Bad Credit? You Can Still Own a Home

This week, I’ve been writing articles to help first time home buyers.  On Tuesday, I wrote about the hidden costs of ownership and yesterday, I wrote about budgeting tips to help you get into, and keep, that first home.  But what are you supposed to do if you have bad credit and you want to buy a home?  It would be great if every person in the U.S. who wanted to buy their first home could just be approved for a low-interest loan immediately. That’s not how it works though, as not every first time home buyer has good credit and a high score.

Don’t despair, though, there are still ways for people with bad credit to accomplish the American Dream of buying a home.  While having bad credit will mean that some first time home buyer programs will be unavailable, there are others which are still a good possibility.  Whether or not these programs are a good option for you will depend on the status of your individual credit situation.

Basically, the options of first time home buyers can be reduced to these two options.

You can buy a house now through Housing and Urban Development (HUD) first time home buyer loan programs From the Federal Housing Administration (FHA).  These programs should be the first place a potential first time home buyer with bad credit should look.  FHA first time home buyer programs guarantee loans through normal, local mortgage lenders with a reasonable interest rates and just a 3% down payment.  Additional information regarding Federal First Time Home Buyer Programs can be found here and here.

There are also local and regional first time home buyer programs for which individuals may qualify.  Some counties and cities within Minnesota have their own grant and loan programs for first time home buyers, including Hennepin County, Ramsey County, Dakota County, and Anoka County.  Minneapolis and St. Paul have a combined program called CityLiving to help first time home buyers.  Even some individual lenders may have their own ways of helping people with bad credit buy their first home.  Additionally, Realtors, financial advisors, and mortgage lenders themselves may be able to point first time home buyers in the right direction for unadvertised local programs. It takes research and diligence to find a lender willing to take a risk on you, but you will most likely find someone willing to help you buy a home.

You can buy a house later more easily if you can wait at least six months before you buy a home so you can repair your credit.  Taking the time to repair credit and build up a credit score will provide a first time home buyer with a variety benefits.  First, you are more likely to get a lower interest rate, which can save tens of thousands of dollars over the life of the loan.  Remember, most mortgages are paid over a period of 30 years.  You don’t want to be strapped with a high interest rate long after you’ve repaired your credit.  The second benefit of taking the time to rebuild credit is that first home itself.  You could be eligible to buy a bigger house or one in a better neighborhood if you repair your credit first.

How do you rebuild your credit? You don’t need to spend extra money on a credit rebuilding service.  Anyone can rebuild their own credit without much help.  Here are the basic steps of how to do it:

• Evaluate All 3 Credit Reports.  Credit reports can be obtained from three main consumer reporting companies, known as Equifax, Experian, and Trans Union.  You can contact them separately or all at the same time by going to annualcreditreport.com.  According to U.S. law, every citizen can obtain a free credit report from each of the bureaus once each year from that website.  Review all three credit reports for accuracy.  If any errors are found, follow the instructions each bureau provides investigating and correcting bad information.
• Pay Bills On Time.  Timing is everything, and this is particularly true when it comes to repairing or maintaining credit.  Promptly pay all bills on time, every time.  Late payments do not reflect well on a credit report and will drag down credit scores. 
• Clear Out Debts.  If you seek to buy your first time home but you have bad credit, you should pay off as much outstanding debt as possible.  All debts that have higher interest rates should be paid first, moving on to debts with lower interest rates next.  Paying off debt will have a positive impact on raising your credit score.
• Reduce Credit Card Use.  Reduce or eliminate your use of credit cards.  Not only do they help you accumulate debt, you end up paying much more for your items due to interest.  You might not want to actually close your accounts, as that can actually hurt your credit status.  Whatever you do, don’t apply for any new credit accounts.
• Avoid Other Credit Pitfalls.  Do not file for bankruptcy, as this may prevent a first time home buyer from being approved for a loan for many years in the future.  Other credit traps to avoid are tax liens and accounts in collection.  These negative marks on a credit score will have a detrimental effect on a first time home buyer’s mortgage eligibility.

Just because you have less-than-perfect credit, doesn’t mean you can’t buy a home.  Either with the use of special programs or some time spent cleaning up your credit and raising your score, you can accomplish the American Dream of home ownership.