Bad Credit? You May Be Able to Buy a Home in One of These Three Ways

Posted on: 29 November 2016

If your credit score falls into the poor (550 – 649) or bad (550 and below) range, you may think you have no hope of getting a mortgage to buy a home. This is not necessarily the case. While you will have to work a bit harder to find a mortgage – especially one at a decent rate – there are options for people with bad credit to buy a home. Here are a few strategies you may want to try.

Look into FHA loans.

An FHA loan is a loan that is backed by the Federal Housing Administration. Essentially, this means that the FHA insures the loan to the lender. If you do not make your payments, the FHA will reimburse the lender. Essentially, the lender won't lose out by loaning money to you if you don't pay; the FHA will. There are other factors for the FHA and the lender to consider – like your employment status and income – so there's still no guarantee you'll get the mortgage.  But, with bad credit, you'll typically have an easier time getting an FHA loan than a conventional loan.

Find a rent-to-own arrangement.

Talk with your realtor or do some hunting on your own to see whether you can find any rent-to-own agreements in your area. Often, these agreements will be between you and the current homeowner -- at least initially. Rent-to-own agreements vary, but usually you will rent the home directly from the homeowner for several years, and then after those years are over, they will sell it to you for a previously agreed-upon price. You will probably have to apply for a mortgage a few years down the road when it comes time to buy the home, but you can work on rebuilding your credit in the meantime so that, when the time to buy does arrive, you have an easier time getting a good rate.

Go through manual underwriting.

If there's a good, explainable reason why you have bad credit, and you have other evidence that you can pay, you may want to try applying for a mortgage with a small credit union who still manually underwrites loans. What this means is that instead of just looking at your credit score and saying "yes" or "no," they examine your entire financial situation, from your history of utility payments to the interest rates on your student loans, and use what they find to determine whether you're a reliable candidate for your mortgage. If your credit score is low because you've skipped a lot of payments and are way behind on your bills, you probably won't be given a mortgage with manual underwriting, either. But if your score is low due to a reporting error, a single bad decision, or just a lack of credit, you might still be able to get a good mortgage rate.