Buying a home is a major financial goal for many people, but it can be challenging if you have bad credit. Bad credit can make it harder to qualify for a mortgage, or force you to pay higher interest rates and fees. However, bad credit doesn't have to stop you from becoming a homeowner. There are ways to improve your credit score, as well as alternative mortgage options that cater to borrowers with low credit scores. In this article, we will explain what bad credit is, how it affects your mortgage eligibility, and how to buy a home with bad credit using subprime mortgages.

## What is bad credit and how does it affect your mortgage eligibility?

Your credit score is a number that reflects your credit history and creditworthiness. It is based on factors such as your payment history, your debt-to-income ratio, your credit utilization ratio, your credit mix, and your credit inquiries. Your credit score ranges from 300 to 900, and the higher it is, the better your chances of getting approved for a mortgage at a low interest rate.

Generally speaking, a credit score below 620 is considered bad credit, and a score above 740 is considered excellent credit. However, different lenders may have different criteria and thresholds for what they consider a good or bad credit score. Some lenders may also look at other aspects of your financial situation, such as your income, assets, down payment, and the type and value of the property you want to buy.

Having bad credit can affect your mortgage eligibility in several ways:

- You may have fewer mortgage options to choose from, as some lenders may not lend to borrowers with low credit scores or may have stricter requirements and conditions.
- You may have to pay higher interest rates and fees, as lenders may charge you a risk premium to compensate for the higher chance of default.
- You may have to make a larger down payment, as lenders may require you to have more equity in the property to reduce their risk exposure.
- You may have to get a mortgage insurance, which is an additional cost that protects the lender in case you default on the loan.

## How to buy a home with bad credit using subprime mortgages?

If you have bad credit and want to buy a home, you may still have some mortgage options available to you. One of them is a subprime mortgage, which is a type of mortgage that is designed for borrowers with low credit scores or other credit issues. Subprime mortgages are also known as non-prime mortgages, near-prime mortgages, or second-chance mortgages.

Subprime mortgages are different from prime mortgages, which are the standard mortgages that are offered to borrowers with good credit. Subprime mortgages usually have higher interest rates, higher fees, shorter terms, and less favorable terms than prime mortgages. They also carry more risks for both the borrower and the lender, as they are more likely to result in default or foreclosure.

However, subprime mortgages also have some benefits for borrowers with bad credit, such as:

- They allow you to buy a home without waiting until you qualify for a prime mortgage, which may take a long time or may not be possible at all.
- They are easier to get approved for, as they have more lenient credit score and down payment requirements than prime mortgages.
- They may help you rebuild your credit, as making timely payments on your subprime mortgage can improve your credit score and history over time.

There are different types of subprime mortgages, each with its own features, pros, and cons. Some of the most common types are:

- Fixed-rate mortgages: These are mortgages that have a fixed interest rate for the entire term of the loan, which can range from 15 to 50 years. The advantage of fixed-rate mortgages is that they provide stability and predictability, as your monthly payments will not change over time. The disadvantage is that they may have higher interest rates than adjustable-rate mortgages, especially for longer terms.
- Adjustable-rate mortgages (ARMs): These are mortgages that have a variable interest rate that changes periodically according to a market index. The advantage of ARMs is that they may have lower initial interest rates than fixed-rate mortgages, which can make them more affordable in the short term. The disadvantage is that they are unpredictable and risky, as your monthly payments can increase significantly when the interest rate adjusts, especially if the market index rises.
- Interest-only mortgages: These are mortgages that allow you to pay only the interest portion of your loan for a certain period of time, usually 5 to 10 years. The advantage of interest-only mortgages is that they lower your monthly payments during the interest-only period, which can free up some cash for other expenses or investments. The disadvantage is that they increase your monthly payments after the interest-only period ends, as you will have to start paying the principal portion of your loan as well. They also increase the total cost of your loan, as you will pay more interest over the life of the loan.
- Balloon payment mortgages: These are mortgages that require you to make a large lump-sum payment at the end of the loan term, usually after 5 to 10 years. The advantage of balloon payment mortgages is that they have lower monthly payments than other types of mortgages, as you are deferring a large portion of your debt until the end of the loan. The disadvantage is that they are very risky, as you may not be able to afford or refinance the balloon payment when it is due, which can lead to default or foreclosure.

## How to improve your credit score before buying a home?

While subprime mortgages can be a viable option for buying a home with bad credit, they are not the best option for everyone. Subprime mortgages can be very expensive and risky, and they may not be available or suitable for your specific situation. Therefore, it may be better to improve your credit score before buying a home, so that you can qualify for a prime mortgage or a better subprime mortgage.

Improving your credit score may take some time and effort, but it is not impossible. Here are some tips to help you boost your credit score before buying a home:

- Check your credit report and score regularly, and dispute any errors or inaccuracies that may be lowering your score. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, TransUnion, and Experian) once a year through [AnnualCreditReport.com](^1^). You can also check your credit score for free through various online platforms, such as [Credit Karma](^2^) or [NerdWallet](^3^).
- Pay your bills on time and in full, as your payment history is the most important factor in your credit score. Avoid late or missed payments, as they can damage your credit score and stay on your credit report for up to seven years. Set up automatic payments or reminders to ensure that you don't miss any deadlines.
- Pay down your debt, especially your high-interest debt, such as credit cards. Your debt-to-income ratio and your credit utilization ratio are also important factors in your credit score. Your debt-to-income ratio is the percentage of your monthly income that goes toward paying your debt, and your credit utilization ratio is the percentage of your available credit that you are using. The lower these ratios are, the better your credit score will be. Aim to keep your debt-to-income ratio below 36% and your credit utilization ratio below 30%.
- Avoid applying for new credit or closing old credit accounts, as these actions can lower your credit score. Applying for new credit can generate hard inquiries on your credit report, which can temporarily reduce your score. Closing old credit accounts can decrease your credit history length and your available credit, which can also lower your score. Only apply for new credit when you really need it, and keep your old credit accounts open and active, as long as they don't charge you fees.
- Build a positive credit history, especially if you have a thin or no credit file. You can do this by using a secured credit card, a credit builder loan, or a rent reporting service. A secured credit card is a type of credit card that requires you to make a deposit as collateral, which becomes your credit limit. A credit builder loan is a type of loan that lets you borrow a small amount of money and pay it back in installments, while the lender reports your payments to the credit bureaus. A rent reporting service is a service that lets you report your rent payments to the credit bureaus, as long as your landlord agrees. These methods can help you establish or improve your credit history, as long as you make your payments on time and in full.

## Conclusion

Buying a home with bad credit is not impossible, but it can be challenging and costly. If you have bad credit and want to buy a home, you may want to consider subprime mortgages, which are mortgages that are designed for borrowers with low credit scores or other credit issues. Subprime mortgages have some benefits, such as allowing you to buy a home without waiting until you qualify for a prime mortgage, being easier to get approved for, and helping you rebuild your credit. However, subprime mortgages also have some drawbacks, such as having higher interest rates, higher fees, shorter terms, and less favorable terms than prime mortgages. They also carry more risks for both the borrower and the lender, as they are more likely to result in default or foreclosure. Therefore, it may be better to improve your credit score before buying a home, so that you can qualify for a prime mortgage or a better subprime mortgage. You can improve your credit score by checking your credit report and score regularly, paying your bills on time and in full, paying down your debt, avoiding applying for new credit or closing old credit accounts, and building a positive credit history.