Buying a Home with Bad Credit: Pros and Cons of Every Option

It’s a sad truth that buying a house with a bad credit score is extremely difficult. You won’t be able to get any great deal on a loan in these circumstances. There are several ways to work around this, such as getting a bigger down payment, private lending, and co-signing. But each of these options has some disadvantages you need to consider before making the final decision.

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Making a Bigger Down Payment When Buying a House with Bad Credit

Making a bigger down payment is the best thing you can do when buying a house with bad credit. In the best case scenario, you should aim for 20% of the total loan amount. This will definitely help you get approval from almost every lender and a reasonably good interest rate.

However, saving up $40,000+ is extremely hard, so only a few people can benefit from this method. But you definitely should make the biggest down payment you can afford, even if it’s only a couple of thousand over the required minimum (usually 3-3.5%).

Using Alternative Lending to Buy a Home with Bad Credit

Traditional bank loans are out of the question when you try to buy a home with bad credit. The chances of getting approved for them are slim and even if you do get approval, interest rates will be extremely high.

Therefore, you need to look around for other options, like credit unions, private lenders, FHA, USDA, and VA loans to name a few. Hiring mortgage brokers in Rotorua will be a good idea as they can find options that a regular citizen might not have easy access to. Be sure to prepare a list of questions for your mortgage broker/lender. Those questions must cover all legal details of the deal, such as what documents you will need. You also need to find out details of the loan terms, including down payment, interest rates, approval requirements, etc.

There are no downsides to this particular method of buying a home with bad credit. Therefore, this is something you should do by default.

Buying a Home with a Co-Signer

Getting a friend or family member to co-sign your loan can help you negate the issues caused by your bad credit. In this case, the lender will examine the co-signer’s income and some other information and make the final decision with the understanding that this person will ‘secure’ your loan. This should reduce the risk of loaning money to you despite your credit score.

The biggest issue with this method is that not everyone has someone to co-sign their loan. Unfortunately, this isn’t the kind of deal you can make with some random stranger. The person in question will be taking a lot of risk by supporting you in this manner. Therefore, only the closest relatives are usually up for this kind of deal. But even then they might not have high enough income to make any difference for the lender.

Note that if you have supportive family members who have the money and are willing to help you in this way, you should consider private lending. This means that you forego the lender altogether and borrow directly from the relative. If you do this, be sure to hire a professional to draw up a foolproof contract. Never take on any major financial obligations without a legal document to outline the exact terms of the deal. It doesn’t matter how close you are with the relative you borrow from and how amazing a person they appear to be. Money issues are one of the major reasons why families break down, so protect yourself just in case.

Conclusion: What’s the Best Way to Buy a Home with Bad Credit?

The best way to buy a home when you have bad credit is always to use every advantage available to you. This means that you should be working to improve your credit score while saving up for a bigger down payment and shopping around for the best lender at the same time. Considering the average house sale prices, only few people can afford to forego taking a loan when buying real estate. Therefore, the sooner you start preparing (read improve your credit and save up), the better your chances of getting a good deal on a loan will be.