How to Buy a House With Bad Credit

If you are reading this blog post, I'll assume it's because you are researching how to buy a house with bad a credit score. You're in luck. Because I happen to have a secret formula for buying a home with bad credit.

In truth, I probably shouldn't be revealing this secret. Once the word gets out, the blog will be flooded with visitors, and my email inbox will burst at the seams. Oh well. I'm going to let the cat out of the bag anyway, consequences be damned. Here it goes.

How to buy a house with bad credit ...

Don't Do It!

There you have it. The best way to purchase a home with a bad credit score. Avoid it altogether. It's one of the worst things you could do in the current economy. Chances are, you won't even be able to pull it off. If you've been watching the news or following this blog recently, you'll know that buyers need higher credit scores today in order to quality for a mortgage loan.

Even if you get a loan with a bad credit score, you are going to pay a ridiculously high interest rate for the "privilege." Lenders will take full advantage of your inability to get a loan through most channels. So the one lender out of ten that actually offers you a loan will tack on an extremely high interest rate, which is going to jack up your mortgage payment even more.

This is the kind of scenario that leads to continued financial hardship down the road. It's why we have record numbers of home foreclosures right now. In the past -- before the mortgage meltdown and subsequent credit crunch -- it was a lot easier to buy a house with a bad credit score. In fact, there was an entire segment of lenders who catered to such buyers. But subprime lenders are now practically extinct, as well they should be.

There is one situation where it makes sense to buy a house with a bad credit score, and that's if you can pay for the home outright (without taking out a mortgage loan). In such rare cases, the credit score doesn't matter because the buyer can pay cash. On top of that, homeownership will help them improve their credit score, so it's a double win. But most people with bad credit are not in a position to buy a house out of pocket, so this scenario is rare.

In most scenarios, it's best for a person with bad credit to focus on improving his or her FICO score first ... before trying to buy a home. This statement has always been true, but it's even more applicable today in light of tougher lending standards.

Some people like to put a rosy, unrealistic spin on this topic. These people like to say that everyone should be able to buy a house regardless of their credit situation or financial status. My response to these people is, "Are you crazy?"

Sorry to be so blunt, but I'm a realist. And I think you deserve the truth. I think it's time to doff the rose-colored glasses and look at our economy in the harsh light of reality.

If you have bad credit there's no need to despair. You simply need to patient but persistent, and focus on improving your score first. Once you do that, you'll be in a much better position to buy a house. You'll have an easier time getting qualified. You'll have more loan options. You'll get a better rate on the loan. And you'll be less likely to become another foreclosure statistic.