Bad Credit? No Problem: 8 Ways You Can Still Buy a Home
Many things can keep you from getting a traditional mortgage loan.
They could include a low credit score, short credit history, recent job change and income you can't use to qualify because it's from a new business.
Even open credit report disputes can make a mortgage lender say no -- I once had to pay an incorrect medical bill just to get a mortgage.
You could argue that some of these issues don't really reflect on your ability to repay a loan, but to keep it simple, we'll refer to all of them collectively as "bad credit."
The good news is there are many ways to buy a home with bad credit. Here are eight of them...
1. Buy a House for Cash
My wife and I bought our most recent home for cash.
It helped that we’d sold a home worth more money, but even if you start with nothing, you can work toward a cash purchase as a long-term goal.
For example, if you can afford a $400 monthly car payment, you could instead buy an old car for cash and save $400 every month to eventually buy a house.
Add tax refunds and any unexpected windfalls to those savings and you might set aside $6,000-$7,000 or more per year.
See my previous post on how to buy a house for cash for more strategies and ideas. You can also consider the following solution.
2. Buy a Cheap Mobile Home
Mobile homes have their advantages, including lower prices than site-built homes, which is great if you have to pay cash.
If you buy a mobile home on land, you even get appreciation like you do with other homes.
Alternately, you can buy a mobile home on a rented lot to lower your housing costs and then save up for a site-built home. Even though the value of a mobile home in a park often falls, this still makes sense if your overall cost is lower than renting an apartment.
Years ago, my wife and I bought a mobile home in a park for $9,000 cash and paid the monthly $300 lot rent.
After maintenance costs, we figured we saved at least $200 per month versus renting an apartment.
Unless the value of the mobile fell by more than $2,400 per year, we would be further ahead. In reality, we sold the home for exactly what we paid.
The key is to buy old mobile homes that have already lost most of what they'll lose in value. Our savings went toward a house we purchased in Colorado.
Sometimes mobile home sellers will finance the sale -- even when you have bad credit. If you go this route, be sure the payment and lot rent add up to less than renting an apartment.
3. Save for a Larger Down Payment
Sometimes bad credit isn’t the problem -- it’s the debt-to-income ratio rules.
Lenders want to see less than 43% of your income going out for all debt repayment. It helps to pay off credit card balances and other debts, but what if your mortgage payment alone is still past the 43% mark?
A simple solution is to start saving.
With a larger down payment, you'll need to borrow less, which lowers your loan payments. Also, if you borrow less than 80% of the value of the home, you can avoid private mortgage insurance (PMI), further lowering your payments.
Plus, with more money for a down payment, you have a better chance of using the next strategy.
4. Get Seller Financing
I found my first home with a simple ad that read, "Looking for a mobile home on land to buy with $3,000 down."
A couple called the day after I placed the ad, and I eventually bought their home. In the end, I scraped together $5,000 and went to the bank for better terms, but the sellers would’ve taken payments.
Not a lot of sellers are willing to take payments on a house, but you only need one, right?
I've sold a home for a down payment of $1,000 because I could get a better price and collect 9% interest. My wife and I sold one of our homes for $5,000 down and $400 per month. These deals are out there if you look for them.
There are various types of seller financing (mortgage, lease option, contract for deed, etc.), and you may pay a higher price and higher interest.
But if you can buy a home for about the same monthly cost as renting, you'll probably still be better off after a few years.
5. Borrow From Family
Perhaps your family knows better than a bank if you're a good credit risk -- and they may be more forgiving of an occasional late payment.
They also won't charge you loan fees and can be more flexible about terms.
And the advantages of borrowing from family for a home go both ways. Parents or siblings might appreciate making a decent return on their money compared to what's available from savings accounts.
6. Improve Your Bad Credit
You may just need to improve your credit report a little bit to qualify for a mortgage loan.
Start by looking at how to raise your credit score. Find the strategies most likely to work for you and implement them.
Clear up any disputes on your report through negotiation or just by paying off debts, whether you think you owe them or not.
Pay down credit card balances and other consumer loans if your total debt-to-income ratio is a problem.
Stick with your current job if you’ll be applying for a loan anytime soon.
If your job history is a problem, read up on Federal Housing Administration rules for employment. Lenders who issue FHA loans look at a number of factors to determine your "probability of continued employment," and you don’t always need the traditional two years of employment to qualify.
7. Find Banks That Hold Their Own Loans
Most banks either sell home loans or want the option to do so, which means meeting the requirements of the secondary mortgage market.
But some small banks and credit unions keep loans in their portfolios because the loans have more flexible qualification rules.
For example, my first mortgage loan was from a small local bank, and I was unemployed at the time. I simply assured the banker I would be called back to work soon.
It helped that I had a down payment of 25% of the price. I also convinced the bank to skip the appraisal and use the tax assessor's stated value, which saved me $400.
Ask around to see which banks keep loans and are willing to look at the whole picture, rather than a bad mark or two on a credit report.
8. Get a Co-Signer
Having someone with good credit co-sign on your mortgage loan will not cancel out your bad credit, according to TheMortgageReports.com.
Lenders will still consider your low credit score or other credit problems.
The primary advantage is the co-signer's income will be considered in determining how much you can borrow.
This might be exactly what you need if your problem is a business for which you don't yet have two years of tax returns, or if you have other income you can't use to qualify.
Your Turn: Do you have credit problems? Have you bought a house yet?
Steve Gillman is the author of "101 Weird Ways to Make Money" and creator of EveryWayToMakeMoney.com. He's been a repo-man, walking stick carver, search engine evaluator, house flipper, tram driver, process server, mock juror, and roulette croupier, but of more than 100 ways he has made money, writing is his favorite (so far).