Buying a Home With Very Bad Credit - A Bad Idea

Question from a reader: "Can you buy a house with a very bad credit score, and if so how would you go about it?"

Let me start with the short answer:
Yes, buying a home with very bad credit is possible. If you pay for the house out of pocket (without a mortgage loan, then nobody will care what your credit score is.

Now for the long answer:
But let's assume that you cannot buy a house with cash down. If, like most people, you need a mortgage loan to cover the cost of the home, then your credit score will most certainly come into the picture. In fact, it's one of the first things a lender will look at when you apply for the loan.

So now we have a different question:
Can I get a mortgage loan with a very bad credit score? While it may be possible to buy a house under these circumstances, it's also (A) highly unlikely and (B) a bad idea. When a lender reviews your finances and finds that very bad credit score, that will likely be the end of the road.

Lenders refer to this as a subprime borrower. This probably rings a bell, because subprime loans have been in the news a lot lately -- and for bad reasons. Subprime mortgages are those given to people with low credit scores. The interest rate on such a loan is typically much higher than the rate a person with good credit might pay.

But here's the thing ... even subprime loans are becoming extinct. The federal government has imposed tougher lending restrictions on the mortgage industry (as a result of the so-called subprime crisis). So the days of "easy lending" to people with very bad credit scores are a thing of the past. This could all change at some point in the future, but it's the state of the housing market today.

So what does this mean to you, as a potential home buyer? It means several things. While you might have had options in the past for buying a house with very bad credit (namely, through a subprime loan program), most of those options are gone today. It also means you need to work on improving your credit if you someday want to qualify for a mortgage loan -- and get a decent interest rate in the process.

This probably isn't the answer you wanted to hear, but it's the answer you need to hear. If you attempt to buy a house with very bad credit you'll likely end up at a dead end. In the event that you do get qualified for a loan, the lender will tack on a ridiculously high interest rate. This means a bigger mortgage payment each month, and a greater chance that you'll have trouble making those payments.

This kind of scenario happens all the time in this country. It's a common pattern. A person attempts to buy a house with very poor credit and ends up paying extremely high interest on the loan. The next thing they know, they are no longer able to make their payments. So the lender forecloses on them. This is happening in record numbers right now, all across the United States.

So for anyone who is considering buying a home (and applying for a mortgage loan) with a bad credit score, my advice is this. Don't do it! Fix your credit score first. Start reducing your debt. Start saving money. Pay all of your bills on time. Do these things, and your credit will improve. And when that happens, you'll have a much easier time getting a loan ... and getting into a new home!