6 Good Reasons to Buy a Home with Bad Credit This Year

Income Is Key

While your credit score is important, lenders are required to carefully look at your income to ensure that you can pay back whatever you borrow. If you are making $50,000 per year, you will probably be wanting to look at a home in the $200,000 range. If you want a home that is $1 million, most lenders will not work with you. Generally, the total monthly cost of your mortgage payment, property taxes and insurance should not be more than 28% of your outstanding debt and should not be more than 36% of your pretax income. If you stay in this range, your chances of mortgage approval are higher.

However, some programs, such as FHA, backed by the US government, may allow you to have a higher DTI ratio, so that could be a good reason to go ahead and buy a home in 2019.

More Lenders Offering Average to Bad Credit Loans

After the last mortgage crash, it became harder to find a home loan with a credit score under 700. But things have changed somewhat. There are many lenders in 2019 who will consider you for a mortgage if you have a 580, 620 or 640 credit score, some conventional lenders and some backed by the US government.

The most important thing to remember when you have bad credit is that you need to show on your credit report and mortgage application that you have cleaned up your financial act. It is ok to have had a foreclosure a couple of years ago, but you should be paying your bills on time for the past year at least. Showing financial stability currently is in some ways more important than your actual credit score.

FHA Loans Come to the Rescue

The Federal Housing Administration is providing millions of renters with the possibility of buying a home today with poor credit scores. If you have a credit score that is at least 580, you may be able to qualify for a loan with only a 3.5% down payment. This is possible because the government backing of the loan gives the lender incentive to provide the credit challenged borrower with credit. Their risk is less, so it makes sense to issue to the loan.

However, if you put down less than 20%, you may have to pay for private mortgage insurance or PMI. This will add to your monthly payment, but it seems to us a reasonable compromise to get a home loan when your credit score is well below average.

Get a Cosigner

If your credit really is bad after a negative event in your finances, but you are currently stable with your job and income, you might ask a relative to cosign your loan. They are vouching for your ability to pay the loan. If you do not keep up with the payments, they will be held responsible. So, you should not ask someone to cosign for your loan unless you are certain you can keep up with the payments.

Make a Bigger Down Payment

If you have poor credit, money talks. They more money you are able to put down on the home, the more likely you are going to be approved. There is less risk exposure for the lender because you are not taking out as much of a loan. A 20% down payment is standard. If you can put down at least this much, your chances of approval will rise, and you won't have to pay PMI either.

Rates Are Rising

You also may want to buy a home sooner than later because rates are on the rise. 30-year, fixed rate mortgages are nearing 5%, and do not look to be dropping soon.

The bottom line is that you can still get approved for a loan in 2019 even with fairly bad credit. Just have a stable payment history for the past year, regardless of what your credit score is, and you should be able to find lenders to talk to.

References: https://www.fool.com/mortgages/2018/09/22/how-to-buy-a-home-with-bad-credit.aspx