Can I Buy a Home with Bad Credit?

New regulations make it tougher to qualify for a mortgage, but the right strategy can help you get approved.

Thank God the recession is over and we made it through in one piece… mostly. My husband lost a job that he’d had for almost ten years and my work schedule was reduced to 30-hours because my company needed to cut back. With that much loss of income all at once, there were times we had to rely on our credit cards and sometimes payments were missed because we just didn’t have the money available. Somehow, we made it through without bankruptcy, but our credit didn’t fare nearly so well. So now, even though he has a new job and we’re both back to making better money, we have bad credit. At the same time, the housing market has recovered and we’d really like to move. Is there any way we can get approved for a home loan given all of the new regulations? Any advice you can give would really help us. Thanks, Lisa W. Dallas, TX

An expert answer from Gary Herman

A Note for Readers: In follow up email, Lisa confirmed she and her husband already own a home but want to move to a better area. Their current mortgage is caught up on payments, although they had missed a few that had to be made up. The property value of their current home has recovered enough that it should not require a short sale. Hi Lisa, You’re definitely not alone. Plenty of hard working people almost lost everything in the recession. Now they’re struggling to get it all back and move forward. Before the recession, getting a mortgage with a somewhat low credit score wasn’t that difficult – there were plenty of lenders willing to extend loans that were risky to the buyer if the economy took a turn for the worse. When it did, the market collapsed. As a result, many subprime lenders went out of business. Now with new regulations and lenders fearing default, buyers have more trouble getting approved – especially for people in your situation where you’ve taken big hit to your credit score. Still, there are ways to get a mortgage even with a low credit score. The Federal Housing Administration (FHA) is an organization dedicated to helping people achieve goals of homeownership. They insure mortgages that wouldn’t otherwise be extended by lenders. So if you go through the FHA loan program, you may get approved even if your credit score is low or you have less than 20 percent for a down payment. Of course, you still have to get approval from a lender on an FHA loan. Most lenders want your score at least in 600s. Of course there are things you can do to make yourself look better to lenders, such as providing a larger down payment and showing you have a low debt-to-income ratio. So really, you need to check your credit to see just how bad your “bad credit” really is. This will require you to learn your actual credit score to see where you stand. You can sign up for a credit monitoring service – either paid or free – to learn your scores. The FHA now offers the Back to Work Program that’s specifically designed for people in your situation – and worse. If you can show evidence of reduced income and hardship that caused your situation, you may be able to get in the program. You will have to take a financial counseling course and receive a certificate of completion. I know you think you may be able to sell your home without a short sale, but the Back to Work Program allows for short sales if it ends up that way. (Other readers should know you can still use this program even if you’ve had a bankruptcy or foreclosure in the last few years.) There are also programs such as Operation HOPE designed to help low-wealth buyers become homeowners without relying on subprime loans. Depending on where you want to live, there are other programs that may be able to help, too. For example, USDA farm home loans allow people with bad credit to purchase rural homes even with no money down. There is also the Teacher Next Door Program if you or your wife are employed as a full-time teacher and you’re willing to move in a low- to mid-income area. Even local governments may have specialized programs. With that in mind, you should check with your local housing office to discuss options available where you live. Also, depending on how soon you want to buy, you may have time to do some work to make it easier to qualify. Since it will probably take time to sell your current home, you may have time to improve. Here are some things you can do before the end of the year:
  • Go through the credit repair process to remove any mistakes or errors that appear on your credit report. These can be common after a period of hardship and removing the mistakes can improve your credit in just a few months simply by making sure your credit report is clean and error-free.
  • Go through credit counseling to get a free debt evaluation and then take the recommendations to get your debt-to-income (DTI) ratio as low as possible. A low DTI will show that you have the means to handle the new loan without struggling.
  • Streamline your budget to build up as much savings as possible for your down payment. You’re probably going to use the profits from your home sale to build up a down payment, but every little bit helps. The higher your down payment, the more attractive you’ll be to lenders.
  • Think about renting for a year to give yourself more time to generate a larger down payment. So if streamlining your budget with your current expense load won’t give you more money, you can consider renting for a year to generate the largest down payment possible before you buy. This will improve your chances of securing a mortgage and give you more time to rebuild your credit before you apply for the new loan.
Get a true handle on your situation then start looking into options. If you need help, our housing counseling department can provide the assistance you need. Gary Herman President of Consolidated Credit Read Gary’s bio