When you think about how to buy a house, what is the first thing that comes to mind? If you are like many Americans, then you think of scrolling through real estate listings.
However, the real house buying process starts well before those steps. Before looking at houses for sale, you should first make sure you can purchase one.
This means making sure you are financially ready for the responsibility of homeownership. If you have bad credit or no money for a down payment, then you may not qualify for a home loan.
Before You Can Buy a House
One of the most important things you can do when you are ready to purchase a home is to get your finances in order before you start shopping. Failure to have your financial ducks in a row can cost you a chance at the home of your dreams.
Take the time to check off each step on the buying a house checklist in this order:
- Check your credit score. Make sure your credit report is accurate and up-to-date so that you are not penalized for errors that artificially lower your credit rating.
- Determine your needs and priorities. Make a list of what is most important about the property you are looking for. Take into account location, cost, size, amenities and accessibility.
- Consider your down payment options. Look at what you can afford to put down upfront. If you have time, then consider saving up to offer a larger down payment.
- Find a lender and complete the pre-approval process for a mortgage. This process will not only qualify you to place an offer when you are ready, but it will also give you a hard figure of exactly how much you can afford to spend on a home.
- Select a real estate agent. Choose someone you are comfortable with and who has experience with the region and type(s) of housing you are interested in.
- Start house hunting. Work with your agent to identify and explore houses for sale and find the one that is right for you.
- Place an offer. When you find the right house, your agent will help you place a purchase offer.
- Order a home inspection. Get the property inspected according to local and state requirements to ensure it is safe, sanitary and suitable for purchase.
- Close the sale. Complete the sale and move into your new home.
How to Buy a House With Bad Credit
How to buy a house with bad credit is one of the first concerns that comes to mind for many Americans when they first review the home buying checklist. However, that does not mean that potential buyers with bad credit are barred from home purchasing and ownership.
If you have bad credit and you are in the market for a house, then there are several key steps you can take including:
- Saving money for a substantial down payment. One of the best ways to buy a house with bad credit is to save up a large down payment in advance. This shows lenders that you are prepared and managing your finances well. It can also reduce the total amount that you need to borrow, improving your prospective credit-to-debt ratio, making you a more attractive borrower.
- Finding a co-signer. Ask a friend or family member with strong credit to co-sign on your mortgage. This is often enough to convince lenders to offer better terms.
- Considering non-traditional or private sales. If you still have difficulty getting approved for a conventional mortgage, then consider private home sales, foreclosure properties and other non-traditional options for buying a home as different rules and requirements will likely apply.
Having poor credit may mean obtaining a mortgage with a higher interest rate or stricter requirements. Reducing the amount of debt you have prior to applying can make you a more desirable loan candidate. Likewise, having a long employment history with the same employer or a large salary will make you appear a more reliable borrower.
Learn About Getting Homeownership Help
When you are ready to buy a house, apply for a mortgage through your local credit union or another lender known for reviewing applications holistically. Some mortgage lenders emphasize other eligibility factors, which improves your likelihood of receiving a loan. These lenders may:
- Give more weight to your financial record and standing with their company.
- Consider your desire to live and invest locally.
- Look over other factors than they do to your credit score.
You should also consider government assistance programs, where available. Check with your local HUD Field Office or Public Housing Agency to see if you qualify for any government home-buying assistance, such as the Good Neighbor Next Door program or USDA rural housing assistance.
Fixing Your Credit as Much as Possible
There is no avoiding the realities that having good credit can make it easier to buy a home and that prospective buyers with better credit typically receive better mortgage terms. While it is not possible to rehabilitate your credit score overnight, you will be in a much better position to get a mortgage if lenders can see that your low score reflects old information and not your current status.
Below are the top credit bureaus:
Check for and correct errors or outdated information on your credit report. To the fullest extent possible, make sure that any outstanding debts are paid off and that your income-to-debt ratio is within desirable ranges.
How to Buy a House With No Money Down
Whether you are a first time home buyer or a repeat buyer, buying a house with no money down can be a desirable option. Down payments can take time to save up and delay your ability to buy a home.
However, you must recognize that lenders view down payments as a sign of buyers’ preparedness for homeownership and financial investment in the sale. When looking at how to buy a house with no money down, you should be prepared to demonstrate your financial readiness and seriousness about the sale in the following other ways:
- Polish your credit score. While good credit is not absolutely necessary, a strong credit rating can go a long way to dispel lenders’ discomfort with your lack of down payment.
- Buy below your means. Attempting to purchase a house at the top of your approval level with no money down is significantly more difficult than purchasing a house beneath your means with a no money down mortgage. The larger the buffer between your income and the total amount owed, the more comfortable lenders will be.
- Be prepared to accept less generous mortgage terms. One of the common costs of bypassing a down payment is that lenders require stricter mortgage terms. These may come in the form of higher interest rates or a lack of grace periods or forgiveness for missed or late payments. Agreeing to these terms can be a vital part of getting a mortgage without a down payment.
It is important to keep in mind that buying a home with no down payment will take longer to pay off. Likewise, your monthly payment may be higher since private lenders will require private mortgage insurance (PMI) until you have paid at least 20 percent of the value of the home.
How is the interest rate affected by the type of mortgage?
In addition to your credit score and other factors, lending terms influence home loan interest rates. Many of these terms are adjustable or customizable depending on the lender as well as your financial history and budget.
Mortgage interest rates will vary based on:
- The length of the mortgage.
- The type of mortgage.
- Whether the rate is fixed or adjustable.
A fixed-rate mortgage is the most popular option and means that the interest rate will remain the same throughout the life of the mortgage. These loans typically last 10, 15 or 30 years. Fixed rates are popular because homeowners can predict the exact dates their mortgages end.
An adjustable mortgage interest rate is a rate that changes at specific times throughout the life of the mortgage. Generally, the rate increases once every year for 30 years. These types of loans are not as common because it is harder to predict how much homeowners will owe in total. However, adjustable-rate mortgages (ARMs) often start at a lower interest rate.
You may also choose an adjustable-rate mortgage with a life of 30 years but the first 10 years have a fixed interest rate. This is called a 10/1 ARM and is best suited for homeowners who plan to move within 10 years. A 10/1 ARM may not be the best solution for homeowners who stay past 10 years unless they work hard to pay off the mortgage early.
Another option is the two-step mortgage, which has a fixed mortgage interest rate for the first half of the mortgage and a different rate during the second half. The second interest rate will change according to the current housing market. Sometimes, the homeowner has the option of making the interest rate fixed or adjustable during the second half.
Learn About Federal Mortgage Programs You May Qualify For
There are several federal mortgage programs that assist low-income households and those with lower credit scores become homeowners. These programs include but are not limited to:
- FHA loans. FHA loans can reduce your down payment, income and credit score requirements when attempting to qualify for a mortgage. FHA loans offer fixed and competitive rates for prospective buyers, including buyers with bad credit scores. However, having an FHA loan will require you to pay a mortgage insurance premium throughout the life of your loan.
- USDA loans. USDA loans are another great option for first-time buyers. They offer little to no down payment in qualifying rural areas. USDA loans also reduce mortgage eligibility requirements. Similarly to FHA loans, these loans will require buyers to pay a mortgage insurance premium as part of their loan.
- VA loans. VA loans are only available to qualifying veterans and service members that meet eligibility requirements related to the length of service, discharge status and other factors. Unlike USDA and FHA loans, VA loans do not require mortgage insurance premiums. In fact, these loans can also reduce closing costs on the purchase of a home, be used to refinance a home that you already own and eliminate down payment requirements.
It is essential that you explore all of the options available to you when it comes to the purchase of a home. The purchase of a home is a substantial investment. You can reduce the amount you will pay throughout the life of your loan as well as potentially reduce your eligibility requirements with the right type of mortgage.