Can You Buy A House With Bad Credit?
In short, you technically can…
However, there is so much to consider when discussing this topic! I think the more well-rounded answer is that you can buy a house with bad credit, but you shouldn’t. Instead, your focus should be on improving your credit score – and the following post will explain why.
We’ll run through some of the options for people with bad credit and why they might not be the best ideas in the world. Then, you’ll see some tips on how to build your credit and get a house with fewer financial issues to worry about! But first, one simple question…
What is bad credit?
When we talk about bad credit, we’re talking about your credit score. Typically, your credit will be measured using one of the three main credit reference agencies in the UK. These are Experian, Equifax and TransUnion. Each has a different scoring system:
- Experian: 0-999
- Equifax: 0-1000
- TransUnion: 0-710
In terms of bad credit, Experian usually judges anyone with 0-560 as very poor, and up to 720 as poor. With Equifax, 0-438 is poor and TransUnion sees scores up to 550 as very poor and up to 565 as poor.
Consequently, it’s a good idea to check your credit score to see where you fall.
Why does your credit score matter?
A credit score doesn’t just matter when you’re looking to buy a house. It’s something that will influence a lot of the financial decisions in your life. Effectively, whenever you are borrowing money or signing a contract to pay for something regularly, your credit score will be checked.
Because companies and lenders want to make sure that you are trustworthy enough to pay them. They need assurances that you are able to keep up with monthly payments and won’t leave them chasing you up.
As a result, if you have a bad credit score it tells companies that you’re not trustworthy. You’re incapable of paying things on time, you have a bad track record when it comes to borrowing and spending money, etc. So, they are less likely to let you borrow money from them. Or, they might provide you with significantly less money than you asked for. It is also extremely common to be put on higher interest rates, meaning the loan will cost more money.
Can you buy a house with bad credit?
When most people want to buy a house, they will apply for a mortgage. Effectively, this is a massive loan that will probably take the vast majority of your life to repay. It gives you the funds to be able to pay for a house and get on the property market. As I said, the majority of people will need a mortgage because houses are incredibly expensive.
Naturally, this means you will need to undergo a credit check to apply for a loan. If you have bad credit, it will be considerably harder for you to get a mortgage. Hard, but not impossible.
These are the best options if you want to buy a house and your credit is poor:
Get a bad credit mortgage
Yes, there are mortgages out there that have been specifically designed for people with bad credit scores. However, it is still harder for you to find and get one than it would be to just get short-term loans for bad credit. This is simply due to the large amount of money that’s being borrowed.
Also, these mortgages will have really high-interest rates. So, they’re going to cost a lot more over the duration of the loan. Why do lenders charge higher rates for people with low credit scores? It seems counterproductive; if you know someone has trouble repaying debts, why charge them more? Surely this makes it even harder to repay? In reality, the high-interest rates are there to help the lender recover as much money as possible if you fail to repay the loan. The payments you do make will be larger than if you were on the standard rate for that loan.
All in all, bad credit mortgages do exist, but they’re not widely recommended – unless this is the last resort.
Save money for a larger downpayment
You will find it easier to buy a house if you have a massive downpayment to put down. Effectively, this means you can pay for a larger proportion of the home than usual. Instead of only paying a 5% downpayment, you might save enough money to cover 20 or 25%. If you’re inherited money, you may even be able to cover way more than this.
Consequently, it is easier to get a loan to cover the rest of the home because you’re asking for less money. Even though your credit is bad – and you still may be on a high-interest rate – the loan is smaller. So, companies and lenders see this as less risky than if you needed a loan to cover 95% of the house price.
Obviously, the downside of this is that it will take a lot of time to save all this money. Unless you’re fortunate enough to inherit some funds or win the lottery, it could take years for you to raise the funds required.
As such, you can argue that this is a bit of a silly idea. In the time taken to save money for a larger downpayment, you could’ve improved your credit score dramatically. So, doesn’t it make sense to just do that instead of living on a tight budget for years on end?
How can you improve your credit score?
Improving your credit score is much easier than saving money to buy a home with a bigger downpayment. Some people think it’s super difficult to boost their score, but this isn’t the case. If you are close to the ‘fair’ rating, you can make a few little changes that boost you out of the bad and closer to a good credit score.
Here’s what you should do:
- Check your credit report
You can request your credit report from whatever credit referencing agency you use to check your score. Doing so is critical as it lets you view all the information on the report. Sometimes, your score can be lower than it should be as there is false or old information still on the report.
Look through the report, check that all the data is correct, and dispute anything that isn’t right. When you iron out any creases, your score could see an instant boost without you really needing to do much at all.
- Register to vote
If you aren’t registered to vote, it will put a big black mark on your credit report. Lenders see this as suspicious as it is harder for them to verify your identity. Again, this is a very simple thing you can do to make improvements in your credit.
- Reduce your debts
Having a lot of debt can look bad on your credit report as it shows that you’re borrowing a lot of money and struggling to pay it back. If you can find ways to reduce your debts, it will reflect positively on your credit score. Maybe even consider a debt consolidation loan as this takes multiple debts and removes them, giving you only one loan to repay.
- Stop applying for lots of credit
This links to the point above as applying for credit can lower your credit score. It’s okay to apply for a loan or a credit card, but if you are constantly trying to borrow money, it reflects badly on your financial situation. Credit agencies see that you are always in need of loans, so it shows you poorly manage your finances. Even if you don’t take out loans, the simple act of inquiring about them can lower your score. So, avoid applying or inquiring about credit until you actually need it!
- Build credit with a credit card
While having too many debts and applying for too much credit is bad, you can actually raise your score by using a credit card. This is called building credit as you prove that you can borrow money and consistently repay it.
The smart tactic is to get a credit card and use it to pay for some of your bills each month. You’re borrowing money from the credit card company to do this, and then you pay your credit card bill in full every time it comes around. It’s super important to pay the whole bill off, clearing your debt, and showing that you’re very responsible when it comes to borrowing money.
- Pay for everything on time
Lastly, make sure you have direct debits set up to pay all of your bills on time. This doesn’t just include credit card bills; it includes things like energy bills, taxes, phone bills, etc. If you consistently pay for things on time, your credit rating will improve as you are showcasing good financial habits.
In conclusion, you can buy a house with bad credit, but it’s not recommended. Instead, your best bet is to build and repair your credit score before applying for a mortgage. You’ll find it is easier to get approved for your loan – and you’ll be on better interest rates so it costs less money for you and your family!
Note: This is a collaborative post