I want to buy a house, but my credit isn’t good. What can I do?

I want to buy a house, but I have bad credit. Should I file bankruptcy? What should I do?

Submitted by Marcella S.

Buying a home is many people’s idea of achieving the American Dream. But the road to homeownership can be stressful, confusing, and overwhelming. When I purchased my first home, I had no idea about the home buying process. I experienced all three feelings as I went through the process for the first time. Being prepared to purchase a home is particularly beneficial when buying a house for the first time.

Get Mortgage Ready

You must first become mortgage ready to purchase a home. Three primary steps convey mortgage readiness to a financial institution. One, all lenders review the borrower’s credit history and credit scores from all three credit bureaus and choose the middle rating. This is known as a tri-merge. It’s a good idea for you to pull all three credit reports for free ahead of time. This way you know what aspects of your credit report needs correcting. Second, they analyze your capacity to repay the loan by looking at your debt to income ratio. Third, there is a review of the collateral value (the house) you are buying to determine what it’s worth.

Each financial institution sets its criteria for qualified credit history and credit scores, debt ratios, and collateral values. So you may need to shop around with a few lenders before you find one that will work with you.

Options for Low Credit

If you don’t have good credit, you may be required to have additional funding and an alternative form of credit like the following:

  • Larger Down Payment: A down payment reduces the risk for the lender. You have skin in the game. They have a buffer.
  • Cash Reserves: Even with a sizable down payment, it’s helpful to have ample cash reserves on hand.
  • Rent History: Be able to verify that you’ve paid your rent-on time consistently for 12 to 24 months.

Is bankruptcy a good option?

If you file bankruptcy, that will only make your credit worse. So that’s probably not a good idea if you want to achieve your objective of purchasing a home in the near future.

I wish you the best in your homeownership pursuit!


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