Categories
1st Time Homebuyer Mortgage

5 Tips on How to Buy a House in Texas with Bad Credit

If you’re a first-time home buyer in Texas, you may have heard from friends on how impossible it is to get a home loan with bad credit. While getting a home loan with poor credit may seem difficult, it isn’t impossible. The majority of Americans are still able to purchase their dream homes even with a less than perfect credit score.

Before we delve into how you can buy a house in Texas with bad credit, I am going to give you an insight on where your score ranks and what you stand to get in terms of mortgage approvals. 

Score RangeCredit LevelMortgage Implications
800-850ExcellentYou rank among the top 20% of Americans. Your loan request is likely to be approved for the best terms.
720-799Very GoodYou may not be at the top of the credit score range, but you are going to get approved with the best interest rates and loan terms.
620-719GoodWhile your score is good, some lenders may require you to pay slightly higher interest rates. But not to worry, you have high chances of approval.
580-620FairYou may qualify for FHA loans but at a higher interest rate. Your debt-to-income ratio needs to be low.
Below 580PoorYou’re likely not to be approved by most lenders. Lenders that may approve you will require a cosigner, huge downpayment, and a higher interest rate.

Remember that while it is important that you have great credit, there are other aspects of your finance that your lender takes into consideration. In the following section, I’ll show you five (5) ways to get a mortgage for your house, even with bad credit.

Find Out Your Credit Score

The first thing you need to do if you’re applying for a mortgage is to know your FICO credit score. You don’t want to go through the stress of looking for homes only to be disapproved because of your poor credit score. Credit Karma and FicoScore allow you to find your credit score for free.

Knowing your credit scores will help you:

  • Make a strong decision on the type of loan program to opt for. Loan programs like FHA that requires a “minimum” of 580 credit score may be a good option.
  • Identify the negatives affecting your score and fixing them.  

Most lenders in Texas focus on credit reports from Equifax, Experian, and TransUnion, as well as your FICO scores based on these reports. They make use of your middle score. So, if your credit score is 720, 680, and 620, the lender will typically base their decision on the 680 score.

Fix & Improve Your Credit Score

After you receive your credit report, you should find out the reason why it is low and the negatives causing it. Most of the time, it is going to be one of the following;

  • You have tons of late payments
  • You do not have enough credit
  • Accounts in collection
  • You have maxed out your cards
  • You have undergone bankruptcy or foreclosures

Now that you may have identified the root cause of your poor credit, you need to strategize on how to fix it or increase its numbers. Some easy ways to fix your credit yourself include;

  • Dispute any errors on your report. If there are debts or items you cannot recognize, it is best you report such discrepancies to the Credit Bureaus.
  • Pay Your Late Payment. On-time payment makes up 35% of the credit score. If you find out series of late payment on your report, pay them off ASAP. You can negotiate the debt terms with the lender.
  • Pay off your credit card balance since it negatively affects your credit utilization ratio.
  • Get your accounts in collection removed. You can politely ask the creditor if they can do a pay for delete for you. You need to delete your collection accounts for it to reflect positively on your credit score.

I usually advise individuals looking to buy a home to fix their credit at least six months before applying for a home loan.

Apply to Lenders with Low Credit Score Requirements

If you are serious about buying a house in Texas with a tanked credit, you should apply to mortgage programs with low credit requirements. A great example is the Federal Housing Administration loans (FHA) administered by FHA-approved lenders.

Under the FHA, you need to have a credit score of 580 with a 3.5% downpayment or 500 with a 10% downpayment to get a loan. While FHA loans usually have a maximum loan amount depending on where you’re buying your home, it is still your best bet when buying a home with bad credit.

Get a Cosigner with a Good Credit Score

This is one of the roads less traveled for individuals looking to buy a home with bad credit. If you have bad credit but really want to buy your home, you can opt-in for a cosigner mortgage. It involves getting a friend or relative to cosign on your home loan to help you qualify for it.

FHA and Conventional loans are loan programs that allow for the use of cosigners. With the average wage nowhere near the average home sale price, getting a cosigner will help to boost your purchasing powers. It is also a great way to boost your overall credit.  

If you are using a cosigner, remember that they do not have to be on the deed but only obligated to the mortgage like you. Most importantly, you can have them refinanced off the loan down the road.

Make a Large Down Payment

Making a large downpayment can increase your chances of getting a mortgage for your new home if you have poor credit. Lenders tend to offer better loan terms to homebuyers with a large downpayment. It reduces the percentage of your loan-value-ratio making the loan less risk to the lender.

If you qualify under FHA loan, you only need 3.5% down if you meet its 580-credit score requirement but 10% if you fall below the 580 mark. Making a large downpayment reduces your principal, mortgage payments, and may help you get a lower interest rate.

Summary

Buying a home in Texas with bad credit doesn’t have to be impossible. From getting your credit in shape before applying or making a large downpayment, there are several loan options for you. You should consult a mortgage officer to go over possible options that may suit your present situation.

By Lah

My vision in the mortgage industry is to NOT be just another application emailed to any borrowers. I want my clients to know I'm here for them even after they get approved for their home loan.

Impressum
NMLS# 497075
NXT Mortgage NMLS# 1582332