When a buyer’s market turns up, many first-time homebuyers become interested in achieving homeownership. However, since the 2008 global financial crisis, loans for first-time homebuyers with poor credit are becoming scarce. You can still find these types of “bad credit loans,” but you should be prepared to pay higher costs.
Higher Down Payment
A first-time homebuyer with bad credit will most likely be required to make a higher down payment. Even buyers with good credit must come up with a down payment between 3.5% and 15% of the home’s purchase price. Someone with bad credit may need to come up with 15% to 20% (or more) in order to get approval for a mortgage loan. Saving up the money for a substantial down payment is a must if you have bad credit.
Higher Interest Charges
Any buyer with bad credit should expect to pay a high interest rate for their home loan. However, a first-time homebuyer (with no mortgage loan track record) may be subject to even higher mortgage rates if he or she has a bad credit score. Since the mortgage lender considers you as a greater default risk, you will be expected to offset that risk by paying a higher interest rate.
Your Credit History
Because mortgage lenders are taking on a greater risk when they lend money to someone with bad credit ― especially a first-time homebuyer ― many of them will ask for an explanation of your credit history. If your credit was ruined because of a medical catastrophe or job loss, you should share this information with the lender because he/she may have an alternative solution.
You might have to write a letter or statement that describes the reasons your credit is bad. You will have to detail the steps you are currently taking to improve your credit score and show that you can handle the responsibility of homeownership. This can be difficult for some first-time homebuyers, but it can help you get approved for a mortgage loan.
Consider Waiting
Since the credit crunch has made it difficult for many people with good credit to obtain home mortgage loans, it might be better to wait. First-time homebuyers may find that they have a better chance of loan approval in a year or two, after they improve their credit score. This can give you time to save money for a down payment and to get your finances in order. Waiting could also help you save money in the long term, because a better credit score will earn you a lower mortgage rate.
It’s important to take your time and see what works best for you. Carefully consider homeownership to determine if now is the best time for you to purchase a house, or whether you should wait to become a first-time homebuyer.