It is possible to buy a house with bad credit. It is also possible to buy a house with a low income. And even though it’s hard, it is even possible to buy a house with bad credit and low income. It’s difficult, but not impossible. And it will take serious commitment and some significant changes in your life.
First of all, as a prospective home buyer, you have to understand how the combination of bad credit and low income look to a lender. From their perspective, such a buyer has a really high chance of defaulting on them. Bad credit and low income translate to someone who is not making enough money and is not smart about spending the little money they are making.
Low income and good credit is not a great situation, but it still shows a responsible borrower. High income with bad credit shows someone who might be irresponsible with spending but has enough means to pay off the debt in the long run. Therefore, the first step towards buying a house with bad credit and low income is to start improving your credit score.
Improving your Credit Score
It is a solution in the long run, especially if the income is low. But it is by far the best solution to become eligible for a decent mortgage program. And it’s not as hard as many would believe. If someone is really stretched thin and has more necessary expenses than the money they are making, a bad credit score is understandable. Otherwise, bad credit is usually the result of mismanaged finances and unnecessary spending.
If you are working on improving your credit, but still have a way to go to the ideal number, you can explain the reasoning behind your bad credit score and the steps you are taking to fix it, to your lender. Even if doesn’t get your mortgage application approved, it would increase your chances if you reapply with a better credit score in the future.
The first step towards improving your credit score is to get your credit reports and understand what is pulling your score down. Ask someone who is in control of their financials to help you with that. Eliminate any unnecessary expenses, cut back on whatever you can, and start paying off your debt. If you are seen attempting to fix your credit, lenders will look at your case favorably.
Down Payment and Savings
It is important to work on your credit score, but it’s equally important to work on your down payment savings as well. A large down payment and significant savings can somewhat tip the scales against bad credit and low income. If you are willing to pay more for a down payment, it lets a lender know that you are serious and improving against your bad financials.
Significant savings are important beyond getting a mortgage. Buying a new house with a low income is hard enough as it is. The hidden but necessary charges and expenses of buying a house will place a serious strain on your financials. Without significant savings, you will have no option but to turn to your income. A low income will have a hard time making ends meet while covering these new expenses.
FHA Home Loans
This is one of the few silver linings for people with bad credit and low income. The Federal Housing Administration (FHA) will insure your mortgage even if you have a credit score as low as 500. Whereas hardly any lender will consider lending to someone with a credit score lower than 620.
FHA loans are especially desirable for people with a FICO credit score of 580 or above because then you will have to pay a down payment of only 3.5%. But if your credit score is 500, you may end up paying a down payment as high as 10%. FHA loans are designed specifically for buyers with bad credit. Therefore, they also try to shield the lender by charging buyers a mortgage insurance premium.
It may end up costing you more in the long run, then if someone with good credit had applied for the same mortgage, but it is an option.
Cash or Family Loan
Bad credit limits your choices as a borrower. Lenders don’t trust people with bad credit. But there are two ways to bypass the whole institution of lending by either using cash or asking your friends or family for a loan.
Saving enough cash to buy a home might seem impossible for low-income families, but it is not. With some hard life changes, selling some stuff and brutal saving for five to seven years can help you save enough to go for some cheap houses. Ironically, that same period and financial management can help boost your credit score to desirable numbers.
Asking friends and family for a loan is a safe option. If they trust that you will be in a better financial position in the future, they can lend you the money with little or no interest.
Cheap Housing Options
When you are not making too much money, and have bad credit as well, you may want to think realistically. Cheap housing options can be a great option since you will be paying a mortgage nearly what you were paying as rent.
You can either opt for a manufactured home with land, a condo, an apartment or a small fixer-upper. Whether you try for a mortgage or use cash, a low house price will help your case significantly.
The solutions above are not mutually exclusive. In fact, combining all of them will probably your best bet. There are some other options as well, like opting for seller financing, rural housing mortgages or going for VA (if you are qualified).
But if you are sure about buying a house with low income and bad credit, be ready to make significant changes in your house. If you become better at managing your finances and increase your income stream, you will be able to pay off your hard-earned house easily.