Is it possible to buy your first home with bad credit?

The quick answer is yes, but there's much more involved. While securing a subprime loan was relatively easy in the past, the mortgage crisis has made lenders far more cautious. If your credit needs improvement, there are steps you can take to increase your chances of approval. However, it's important to carefully consider whether pursuing a loan is worth your time before diving into available options.

Is purchasing a home the right choice for you?

While it's true that things have changed significantly in recent years, and tighter loan restrictions are preventing people from overextending themselves, you must consider whether, given your credit report, you're truly ready for the responsibility of homeownership right now.

To qualify for a loan, you might need to save up a substantial down payment or agree to a higher interest rate than you'd prefer. Additionally, you may need to wait several years for the limitations on a foreclosure or bankruptcy to expire. Owning a home is often the largest financial commitment many people will ever make. Before moving forward, ensure that homeownership is something you truly desire.

Preparing for a Stable Future

Real estate prices are likely to stabilize, and the market might eventually regain its lost value, but not without some bumps along the way. If you're determined and ready to take the risk, keep reading. If you're not, you could always use the time and effort you’d spend searching for a house to improve your credit score instead.

Postponing your home buying plans for a year or two to reduce debt and enhance your credit score could save you money in the long run. With some luck, you might also find a seller willing to consider a rent-to-own deal, allowing you to build up your down payment while simultaneously boosting your credit rating.

Ways to Buy a Home with Bad Credit

If you're set on buying a home right away despite your credit, there are steps you can take. If your FICO credit score (the number lenders use to assess your eligibility for loans) is below the standard for conventional lenders, one option to consider is applying for a U.S. Federal Housing Administration (FHA) loan. The FHA assists borrowers by assuming the risk if you default on your loan.

Since 1934, FHA insurance has helped secure more than 37 million home loans. It’s an excellent way to buy your first home with a low down payment and limited or poor credit history. You’ll need to demonstrate current financial responsibility, but past issues like bankruptcy or foreclosure won't automatically disqualify you [source: HUD].

Another option is to find a seller willing to carry the loan. If you have a personal connection with the seller and they trust you, this could be a viable choice. Additionally, you might be able to get a family member to co-sign the loan to help secure the purchase.

You may also be able to find a lender willing to give you a chance, but it may come with a steep cost, typically a high interest rate. Subprime loans, which are designed for those with less-than-ideal credit, are less common in today's economy. While conditions are tough now, the options could improve as the housing market rebounds. Regardless, buying a home without good credit will likely cost you more than if your credit were better.

Before you start driving all over town searching for the ideal house with the perfect garage or garden, take the time to get a copy of your credit report to understand your current standing. If there are any mistakes that are negatively affecting your financial profile, address them early. A few extra FICO points can make a significant difference, especially at the lower end of the credit scale.