How to Improve Your Credit and Buy a House

December 5, 2013

buy a houseIf you want to buy a house with bad credit, the drop in housing prices over the last few years may be a little frustrating. Real estate is still on sale but it may be tough to get approved for a home loan with bad credit. It doesn’t mean that you absolutely won’t be able to buy a house, but it does mean that you will face some challenges and need to work on improving your credit.

Bankruptcies and Foreclosures

If you have a low credit score, with no bankruptcy or foreclosure, you might be able to purchase a home now. You will have to pay a higher interest rate, and you might not get the best loan terms, but you probably won’t have to wait – as long as you have a large down payment and a credit score above 500. (If you have a small down payment, you might not be able to get a bad-credit mortgage with a score below 580.)

Waiting periods apply if you have had a bankruptcy or foreclosure. Most lenders won’t offer you better rates until a bankruptcy is four years behind you and it has been at least two since a foreclosure. In order to qualify for a FHA loan, you have to be at least two years away from a foreclosure, and you can get a loan with as little as a 3.5% down payment.

Improving Your Credit to Buy a Home

So what should you do if you don’t have any recent bankruptcies or foreclosures and would like to buy a home but have bad credit? Your first move should be to try and improve your credit score. Here are three ways to begin improving your credit score:

  1. Make your payments on time and in full.
  2. Pay down your debt, reducing your debt-to-income ratio.
  3. Avoid applying for very much new credit.

One way to build a history of making regular payments is with a credit card, but you may not qualify for one if you have bad credit. One option is to open a secured credit card, where lenders are willing to give you a credit card if you provide collateral in case you don’t make your payments.

As long as you use it responsibly, making regular purchases and paying down the balance each month, this can be a fast way to help your credit score.

Other Ways to Improve Your Qualifications

Other things that can help you improve your qualifications for a home loan include:

1. Earning a regular wage.

Self-employment offers a different challenge. If you are self-employed, you should be able to show tax documentation of regular earnings. However, self-employment income isn’t going to be viewed by lenders as favorably as a salary. Show that you have been steadily employed for at least a year or two.

2. Saving up for a down payment.

If you have poor credit, you can improve your chances with a down payment of at least 10%. If your credit score is lower, approaching 600 or below, you might need 20% down. If you have a credit score of less than 500, there is a good chance that you will need a 35% down payment to qualify.

3. Having a letter of explanation.

If you have a compelling explanation for your low credit score, a letter of explanation might be required. You can explain extenuating circumstances (such as job loss or medical catastrophe) that led to your poor credit. You can also describe what you are doing to improve your financial situation.

When you have bad credit, it is still possible to buy a house. However, you will need to work hard to improve your credit score at least a little, and you may have a couple other hoops to jump through.

Are you trying to buy a house with bad credit? Tell us about your journey in the comments!

This article was originally published April 30th, 2011.


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Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

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5 Responses to How to Improve Your Credit and Buy a House

  • Jesse Michael

    Ideally, every american consumer would be able to follow these steps to improve their credit. However, many americans (not all, because some are just irresponsible) have experienced extenuating circumstances that have led them to their current credit situation. For many people, paying their debt down is nearly impossible because their survival expenses outweigh their income.

  • Joespha

    The only way to improve your credit score is to stop using the credit card and start paying all the pending payments on the credit card. You should contact your creditors as soon as you know you will have a problem paying bills on time.


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