Having good credit is important if you want to purchase a house. Good credit opens doors to loan availability and good interest rates. However, if you have bad credit and want to buy a home, there are only a few options available to you. The best recommendation is to wait it out, improve your credit score and then apply for a traditional mortgage. It takes a year or two of assiduous effort to raise your credit score high enough to enable you to qualify for a low interest rate home loan. There are several ways you can help to repair your credit score.
Check your credit reports
Request your credit report from all three major credit agencies. Mortgage firms and lending institutions research your credit and your score is the first item they look for. Understanding your credit report is important. Most agencies evaluate your credit with a grade, where A is good, B is okay, C means fairly bad credit and D is given for very bad credit.
Verify that everything on the reports is accurate and report any errors to the credit agency that published the report. You can actually help your credit score by correcting the errors. Sometimes this effort will raise your score up sufficiently to enable you to qualify for a traditional home loan mortgage.
Calculate your "loan-to-value" ratio
The next step in determining your loan eligibility is to calculate the ratio between the amount being borrowed and the value of the property being used as collateral. This ratio is referred to as "loan-to-value" or LTV. For example, a borrower qualifying for an 80 percent LTV loan can purchase a $100,000 home with a loan of $80,000.
You can calculate your debt-to-income ratio by adding together all of your debt payments, including the loan being applied for. Divide this number by the net cash available to you each month for living expenses after debt payments. A score of approximately 40 percent or less is preferable and will give you good odds at getting the loan.
Use credit to repair your credit
Another way to repair your credit is by using credit. Find new forms of credit and pay them back on time. If you already have a credit card, make sure it stays paid off. Use it once a month, but ensure that you pay the balance off each month in full or at least try to pay back a bit more than the required amount. This looks good on your report. If you don't have a credit card, try to get a "secured" credit card offered by the bank wherein the amount you deposit into the account is the amount of credit you are allowed.
Apply for a "bad credit home loan"
If you do not want to wait the average 24 months to get your credit up to par, and you need a house right away, the other option is to seek out a bad credit home loan, also called a subprime loan. Subprime mortgages charge exorbitant interest rates. Be certain you can afford to make the monthly payments. The housing crisis of 2008-2010 imposed severe restrictions on banks and lenders with respect to the interest rates and origination fees they are allowed to charge. Keep in mind that income verification will be required.
Find the best rates
If you do opt for a bad credit mortgage, spend time looking online for the best mortgage rates. There is an abundance of online poor credit lenders who would willingly be available. Regardless of which type of loan you are applying for, it is important to spend time researching the best mortgage rates and evaluating the history of the lender. Even with bad credit, it is possible to buy a home.