How To Buy A House With Bad Credit
Buying a house with less than perfect credit is doable. You can secure a low interest rate on a 30 year fixed-rate mortgage even if you have bad credit or high revolving monthly debt.
So how do you buy a house with bad credit? Lenders take into consideration your gross monthly qualifiable income, your credit score and the revolting monthly debts you have on things such as credit cards and other loans that appear on your credit report.
Speak with your mortgage lender about how to buy a house with bad credit, including your monthly debts.
For example let’s say you’re thinking about buying a house and had a conversation with a mortgage lender about how much you qualify for. Your goal is to purchase a $300,000 house, but you’re only qualified for $250,000
Your income is $5000 per month/$60,000 per year.
Your credit score is 643
Your monthly debts are limited to one auto loan payment of $450 per month. The balance on the auto loan left is $4234.
The total new house payment for the $300,000 house is $2057 per month (including principal, interest, taxes, insurance and mortgage insurance) using 4.125% on a 30 year fixed rate FHA mortgage.
The debt to income ratio for the mortgage lender is a bit too high at 51%. Meaning the total amount of debt relative to your gross income is out of the lender’s comfort level.
Here’s the math: total new house payment $2057 + $450 car loan equals $2507 per month in total proposed debt.Total debt is comprised house payment plus the auto loan combined. We take the $2507 per month and divide that into the gross monthly income of $5000 per month. That gives us a debt to income ratio of 51%.
How to buy the house
Pay off the auto loan. Paying off the auto loan reduces the debt to income ratio from 50% to 41% and you can pass FHA qualifying ability all day long. This effectively increased purchasing power by $50,000 because the original loan qualification was $250,000 and omitting the car loan increased the house price to $300,000.
FHA Loans
USDA Loans
VA Loans
These programs ALL allow for the less perfect credit and for higher monthly revolving debts.
The best way to improve qualifying ability when buying a house is to pay off whatever debts are handcuffing your ability to qualify into the house price range that you are looking at. This means paying credit cards off in full and not racking them up a monthly basis. It also might mean refinancing any auto loans or student loans.
Note:For every dollar of debt, $20 of income is needed to cover it.
For every $100,000 borrowed that’s a payment of $725 per month.
For every .125% in mortgage rate per $100,000 borrowed that’s a monthly payment of $8.12 per month.
If you were buying a house and have bad credit, you can still get a mortgage.
How improve purchasing power:
-pay off debts
-refinance debts
-purchase less house
-increase down payment
-credit repair
What happens if the credit score needs work?
Speak with the mortgage lender you’ve chosen to help you buy a house. More often than not the mortgage loan officer can tell you what you need to do to your credit report to get your credit score high enough in order to qualify for purchase loan financing. It might be as simple as paying down credit card to 30% of the maximum balance.
Here’s some more information on credit scores relative to buying a house.You can buy a house with bad credit, by cleaning up your debts.