Atleast once a week, I get an email that sounds something like “I have bad credit and I want to buy a house” or “…I want to lease-to-own” or my favorite “I have bad credit and I want to buy a bank owned property.”
It wasn’t that long ago that you could purchase a house with a credit score less than 600 however as we have all experienced over the last five years, that isn’t a recipe for success. Some sub-prime loans were made to borrowers that were less-than-mortgage worthy and those borrowers quickly defaulted as a result of not having savings or an adjustable rate mortgage.
Bad credit is a fairly subjective term. If you’ve had a home foreclosed upon or declared bankruptcy and had that discharged in the last 7 years, you are most likely not mortgage-worthy yet. Same holds true for borrowers that have had a car repossessed or faced eviction from their landlord.
Judgments, wage garnishments, unpaid tax levy’s are also items that will prevent most home buyers from obtaining a mortgage – but that can change as these items are paid in full.
For buyers with low credit scores, the best solution is to pay bills on-time, open a credit card and keep your balance below 1/3 your credit limit (best not to keep a balance at all). Low credit may not be your only obstacle to purchase so it’s a good idea to speak with a mortgage banker to find out what it will take to become eligible for a mortgage.
You will also need savings to use a down payment on your new home. For a government-insured FHA mortgage, borrowers will need atleast a 3.5% down payment ($3,500 on a $100,000 home) plus closing costs (varies by lender).