First Time Homebuyer With Bad Credit in PA: To Buy or Not to Buy

You have a dream of homeownership, but you’re also keenly aware that your credit isn’t so great, limiting your chances as a first-time homebuyer. For anyone with bad credit in PA, this discussion is for you.

There are several financial options available, even to the credit challenged. However, it’s tough to know which program is a good fit. And you don’t want to end up biting off more than you can chew financially, resulting in an even worse position. Should you try to find and buy a house right now, with not-so-great credit? Or should you wait until your finances improve?

Here’s what every first-time homebuyer, with bad credit, in PA needs to know.

Let’s Define Bad Credit, According to the Lenders

Most traditional lenders have benchmarks they use when determining if a person has poor credit. What most people don’t realize is that while lending institutions typically don’t extend mortgages to credit scores below 620, they aren’t bound by a minimum credit score limit. So, in a sense, no score is too low for a mortgage. That doesn’t mean, of course, you’ll get a loan. Lenders can decide to lend to whomever they choose. How you fare in these other key categories will more than likely determine whether or not securing a traditional mortgage is in the cards for you.

• History of Timely or Missed Payments
• Amount of Debt Owed
• Diversity of Credit
• Length or Newness of Credit History
• Borrower’s Total Down Payment Amount
• Earnings and Work History
• Accounts in Collections

Again, while the credit score itself isn’t the only factor considered in obtaining a loan, credit scores for first-time homebuyers can certainly fall into a bad credit category. Not every bank or lending institution uses the same credit reporting, either, so knowing your Experian, FICO, and TransUnion scores can be helpful. Here is a general categorization of excellent to poor scores to see where you stand right now.

• Excellent Credit Score Range: 800 – 850
• Very Good Credit Score Range: 720 – 799
• Good Credit Score Range: 620 – 719
• Fair Credit Score Range: 580 - 619
• Poor Credit Score Range: 579 or Lower

Remember, even the most terrible of bad credit scores in PA can still have a shot at a mortgage. However, the lower scores, along with the other factors mentioned, might translate to higher interest rates and less flexible terms. 

First-Time Homebuyers with Bad Credit Have Options

Now that you have a better understanding of where you stand with your credit score, it’s time to review some of your available mortgage options. Cash is king, especially in real estate. So, the more you have saved up and set aside for a potential down payment and other home buying expenses, the better position you’ll be in to secure financing.

Conventional Home Loans

We covered some of the basics of credit scores as they relate to traditional loans. But the conventional loan from a bank or credit union might also make some exceptions to a bad credit score. If your income is substantial and you have a sizable down payment, a conventional home loan could still be feasible for you.

FHA Loans for First-Time Homebuyers

The Federal Housing Administration backs what is commonly referred to as an FHA Loan. First-time homebuyers with bad credit can take advantage of these loans. They’re attractive because there are fewer requirements for securing FHA financing, including the minimum credit score of 500 to get started. Also, an FHA loan is only applicable in buying a property in which you intend to reside.

VA Loans for Veterans

If you’re a first-time homebuyer with bad credit and you’re a veteran, you could qualify for a VA Loan, which is traditionally backed by the Department of Veterans Affairs. These lending options are available with no money down but may apply a “funding fee” up front. There are other standards you might have to meet, depending on your financial situation and current credit score.

USDA Loans on the Federal Level

Some homebuyers might qualify for a USDA loan, backed by the federal government, more specifically, the US Department of Agriculture. These loans come with zero down payment perks. However, there is a minimum credit score of 640 to qualify. And depending on your situation, there may be additional requirements to meet regarding income.

The First-Time Homebuyer with Bad Credit Checklist 

Before you decide whether or not you’re in a financial position to buy a home or not, start with this checklist of steps. Good credit or bad, you’ll need to have a clear understanding of where you stand before making any significant purchase decisions. And how you answer these key points will also help you put together a timeline that makes sense to your bottom line.

Start with Your Credit Report Analysis

Before you assume your credit is in the tank, take a hard look at your score and the factors contributing to it. You might find discrepancies on your report that you can dispute or have removed. You might be better off than you originally thought. There are free credit reporting services out there to get started, including Credit Karma that compares the major reporting bureaus’ scores in one dashboard.

Reach out to Credit and Housing Counseling Services

If you’re financially dire and need help addressing some of those debts, don’t be afraid to connect with professionals who can help. There are counseling services available, some paid and others as community resources, that can assist you in putting strategies together for addressing your poor credit. 

Discuss Your Options with a Lender

You can reach out to your bank or credit union to just have an initial conversation about your options. And if you have a good relationship with your institution, they might be able to point you in the right direction to explore and secure funding. If you don’t have a bank, that’s ok, too. You can still meet with a lending professional to have someone explain the process to you, step-by-step, and offer some guidance in setting financial goals for yourself.

Identify and Take Steps to Rebuild Your Credit

Knowing your credit score and financial blemishes is one thing. First-time homebuyers need to also look for action steps to improve and rebuild credit. This might involve liquidating assets to pay off debts or asking family members for help. Start with small manageable steps to effect change, based on what you can afford. Any progress is good progress.

Look for Ways to Pay Down Debts

If you have one or many high credit card balances or loans out there, you’ll want to take steps to reduce them ongoing. Start with the smallest balances and make payments you can afford to clear them off your report. You can then apply extra to payments you’re already making to those larger accounts. And if you need to call creditors to ask for payment plans, don’t be afraid to do so. Most creditors will have options available that make paying down those debts more comfortable on your bank account.

Can You Increase Your Income?

Another way to significantly improve your current financial situation is by bringing in more income. This, of course, isn’t going to be feasible for everyone. However, it can be helpful to sit down and brainstorm for ways to grow those revenue streams. Can you take on a side hustle, like tutoring or rideshare driving? Can you ask for additional hours at work or switch schedules to improve pay rates? Any extra income you’re able to bring in should go directly toward paying down debts or saving for a down payment.

Can You Grow Your Down Payment Savings?

You might already have a small nest egg set aside to serve as a potential down payment on a new home. Whether it’s $100 or $10,000, you can always be looking for new ways to add to this reserve of funds. Consider cutting out the morning drive-thru coffee and instead tossing those few bucks into savings. Download receipt collecting apps that offer cash-out rewards, like Receipt Hog. Have a yard sale or sell that fixer-upper car in the garage that you’ll likely never get to fixing. Every dime you manage to save is just another $.10 closer to homeownership!

Setup or Grow Your Emergency Fund

When you’re in debt or are facing financial hardships, the hardest thing to conceive of right now is saving for a rainy day. But the financial advising experts always suggest doing your best to do so, even if it’s only in small increments. You’ll be surprised how quickly small change can add up collectively. And that emergency fund will come in handy when you’re applying for home loans and needing to convince a lender of your capability to pay a mortgage.

To Buy or Not to Buy

So, now that you know where you stand with your credit situation, should you buy a house? The short answer is yes. As previously discussed, there are plenty of loan resources available intended to help those with less-than-stellar credit achieve first-time homeownership. And the other thread of good news is that you always have a way out of a bad credit situation, even if it means taking baby steps. 

That’s great and all, but should you buy a home with bad credit?

That answer is a little more complex. You don’t want to rush into a hefty financial commitment to a mortgage with concerns of affordability six months or a year from now. Homeownership is a long-term endeavor but also requires some acute math calculations. Can you afford a monthly mortgage payment? Can you get a far better interest rate if you pay down some of your current debts and look for loans next year? Are you concerned about job security or other household situations that might affect your ability to keep up with a house payment? Only you can answer these questions.

If you feel comfortable with your responses to some of these long-term projections, it very well may be your time to buy your first home! And securing your financing options first is generally the best first step. Once you know what lending opportunities you have, you’re ready to work with a real estate professional to help find a dream home within that estimated budget.

There is a lot of guesswork and critical thinking that goes into deciding whether or not you should buy your first home with bad credit. But there’s one aspect of the process that’s a no-brainer. When you’re ready to find a Realtor to explore the Lehigh Valley listings, Homeway Real Estate is the first call you should make. Our team can help you find that ideal dream home within your lending budget and can shepherd you into the glorious experience of first-time homeownership!