If you apply for a mortgage, lenders will look at your credit score. If you have bad credit, they may deny you a loan entirely. Or they may charge you a higher interest rate if they are willing to let you borrow at all. This can make becoming a homeowner more expensive.
Since bad credit negatively affects your ability to get an affordable home loan, you might be wondering if it makes sense to go ahead with homeownership if your credit score is flawed.
The answer is that it depends, but there are situations where you can choose to bite the bullet and buy a home even if your credit isn’t great. Here’s how you can decide.
Are you financially ready to buy a home?
The very first thing to consider when deciding to buy a home with bad credit is whether you are in good financial health in general.
You see, sometimes people have low credit scores because they don’t borrow money and therefore don’t have a great credit history. Or in other cases, past disasters hurt their credit, but they are now in a good financial position. If so, going ahead with buying a home might not be the worst choice, even if you need to get a mortgage at a slightly higher rate than someone with a better credit score. You can start benefiting from property appreciation, work on improving your credit, and hopefully refinance after a short time once you’ve shown yourself to be a responsible borrower.
But if your credit rating is low because you’re struggling to pay off your current debts, you certainly don’t want to buy a house and create a huge additional financial obligation for yourself.
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How long will it take to improve your credit?
Obviously, it would be ideal if you could improve your credit score before buying a house so that you have a wider choice of affordable lenders. But if it will take you years to do this because you have a lot of recent black marks on your credit, then you might not want to wait.
When you delay home ownership, you might see properties get more expensive in the meantime. You would end up paying more and missing out on the extra money that comes with increasing property values. Of course, there’s no guarantee this will happen, and prices could drop as well, so a lot depends on the current market conditions where you live.
Delaying homeownership means you’ll be paying rent longer and not building up equity, and you might not want to keep doing it while you wait years for your credit to improve. . Even if you’re stuck paying a slightly higher mortgage rate because of your credit score, you could still improve your net worth by becoming a homeowner instead of a renter. In effect, by doing so, your payments would help you acquire an asset rather than just paying for a home.
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How much would your mortgage really cost you?
Finally, you’ll want to consider what mortgage options are actually on the table for you when deciding to buy a home with bad credit.
Some government-backed loans, such as FHA, USDA, and VA loans, may provide affordable options for borrowers with bad credit. If you can qualify for a loan at a reasonable rate from these programs or other mortgage lenders that cater to borrowers with bad credit, home ownership can easily be within your reach.
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You’ll also want to remember that mortgage interest is tax deductible if you itemize it, so the government is essentially subsidizing the interest you pay. And you can refinance in the future if your credit improves, so you’re not stuck paying higher mortgage interest for life.
Ultimately, you need to consider these three questions and carefully assess your personal circumstances when deciding if the purchase is right for you. But if you’re in a good financial position to pay a mortgage and make a down payment, don’t assume bad credit means home ownership is out of reach.
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