You and your family have been renting for years, paying $2000/mo., and want to buy your first home but have bad credit. Can you buy a house with bad credit? Yes. Let's look at a mortgage option that could bring your down payment down to 3.5% and get you into a house of your very own.
When you have a low credit score, don't give up on your dream of owning a home. There are options available including FHA loans which have the lowest credit score requirements of any type of mortgage. FHA loans are guaranteed by the FHA, have down payments as low as 3.5%, offer competitive rates, and are geared toward making homes more affordable for low- to middle-income families.
You can qualify for a FHA loan if your credit score is over 500. If your credit score is approximately 500-580, you will likely pay a 10% down payment. If your credit score is 580+, your down payment will only be 3.5%. On a $200,000 home, that means your down payment would only be $7,000, if you qualify for 3.5% down. (With a conventional loan you would be paying 15-20% down [$30,000-$40,000].)
For FHA loans, lenders want to see your monthly mortgage payment below 31% of your gross monthly income. For example, if you and your spouse gross $3,500/mo., your monthly mortgage payment shouldn't exceed $1,085. Determine how much you can afford to pay towards a mortgage each month, before you begin looking at homes, to avoid homes priced above your budget.
It's important to know that bad credit scores are seen as higher risk by lenders. So if yours needs a boost, consider taking a year to improve your credit score. You can even take advantage of first-time homebuyer counseling through FHA.gov. Before you know it, you'll be in a position to qualify for a FHA loan or others.
Regardless of whether you qualify for a FHA loan or not, get a real estate agent. They are free. They only get paid if you buy a house and... they get paid by the seller. If you need help from a local real estate agent, we can help. Add a comment and we will get back to you.
For more information on mortgage options, please download our extensive guide: