Bad credit can make it more difficult to buy a house, but it does not automatically exclude you from becoming a homeowner. You can, in fact, still buy a house when you have bad credit. But there are some realities that you have to expect as you make the attempt.
Waiting After Bankruptcy or Foreclosure
If you have bad credit because of a bankruptcy or a foreclosure, you will have to meet waiting period requirements before you can buy a house. Normally, you will have to wait at least four years in the case of bankruptcy and two years in the case of a foreclosure. However, some mortgage lenders may want you to wait a little bit longer.
Paying More for Your Mortgage
When you buy a house with bad credit, you will have to be willing to pay more for a mortgage loan. Your interest rate is influenced by your credit rating; if your credit score is low, you will have to pay a higher interest rate. This means that, over the life of the mortgage loan, you may have to pay tens of thousands of dollars more in interest (than you would pay with a good credit score).
Your best bet is to do what you can to improve your credit score before you try to buy a house. Some things you can do include the following:
- Make bill payments on time
- Reduce your debt
- Avoid opening too many new credit accounts
- Make sure your credit report is accurate
Even if you can get an mortgage rate that is 1% better than before, you can save thousands of dollars over the life of your mortgage. You can also work hard to improve your credit and build home equity so that you can refinance to a lower rate when your credit improves.
Showing that You’re Making an Effort to Improve
If you have bad credit and you want to buy a house, you may be required to submit a statement about your financial situation. This is usually in proper letter format. You need to explain what led to your bad credit situation, and what you are doing to improve your situation right now. You need to be able to show that you are ready to buy a house right now, and that you are not going to present a huge risk of default. You will need to demonstrate a willingness to meet your obligation on the home. This is especially important if your bad credit is largely the result of a foreclosure or bankruptcy.
You can buy a house if you have bad credit. But you will need to work a little harder to prove you are able to take on the obligation, and you need to be prepared to pay more in interest.