Have you ever wanted to buy a house but found yourself stuck because of your credit score? Home loans for bad credit are available. In home loans, it is not uncommon to have a bad credit score. Don’t worry if you are in the market for a home but have a poor credit score! There are several ways to get a home loan with a low credit score. Before buying a home, it is crucial to understand the process.
In this blog post, we will discuss how to get a home loan with bad credit and what steps will improve your credit score so that you can qualify. So, keep reading for some helpful advice.
Can You Buy a House with Bad Credit?
A mortgage lender would like to look at your credit history (your FICO score), among other things. They will decide if you’re qualified for the loan, the interest rate, and how much money they’re willing to lend you. While it’s true that bad credit loans exist, you may have to pay higher monthly mortgage payments due to much steeper interest rates.
FICO scores determine your creditworthiness, and the lower it is, the worse off you will be. There is a range of FICO Scores from 300-850, and the “good” credit score range is 670 -739. According to Experia, anything under a 670 can hurt consumers with bad or subprime scores. A fair credit score falls within 580-669, and a poor credit score range from 300 – 579.
The credit scores are calculated by multiple lenders based on these things:
- Payment history
- Amount of debt to income ratio
- Length of credit history
- The age of your loan and credit card accounts
- New credit
- If you pay your bills on time
How To Buy a House with Bad Credit
A conventional loan is an excellent option for those who need access to money quickly. There isn’t a set minimum requirement, as long as you have good credit reports and can prove that your income will cover borrowing costs. What is the worst credit score needed to qualify? A 620 or better!
However, other factors could affect this decision, such as high income and a larger down payment amount, can allow for a lower credit score. However, if you exceed what’s required by lenders’ standards, they still will not count a credit score too far below 620!
The U.S. Federal Housing Administration (FHA) loans offer a range of creditworthy home loans that are government-backed loans. However, you need a credit score of at least 580 or higher to qualify for a low down payment FHA loan. They are open and willing, so why not take one?
You won’t be troubled by making a larger down payment if you choose this option. Instead, the minimum down payment eligibility requirement for an FHA loan is just 3.5%. No matter what type of home purchase you’re looking at!
An FHA loan may be an option for those who don’t have the typical credit history. This is because they focus on non-traditional applicants. People looking for financing at more affordable rates than traditional banks should consider FHA loans. An FHA loan has smaller down payment requirements. For example, with a 10% down payment, the minimum credit score requirement is only 500.
Every mortgage lender knows the risks that come with low credit scores. Therefore, FHA loans have loan terms to protect lenders from potential losses. Such as, requiring homeowners insurance and an upfront mortgage insurance premium (MIP).
The upfront cost is 1.75% of the amount of money you are borrowing. Plus, the annual MIP rate ranges anywhere between 0.45%-1.05%. The exact amounts are determined by the size of the loan, the term in years, and the loan-to-value ratio. Your Home Lending Advisor has all of this information and can provide current mortgage insurance rates.
During the Coronavirus crisis, some FHA mortgage lenders require a higher credit score than these government backed loans require. Although the FHA minimum credit score requirement has not changed.
VA loans offer some of the lowest rates and most flexible credit criteria. But they aren’t available to everyone.
To qualify for a U.S. Department of Veterans Affairs (V.A.) loan, you must be a retired miltary member or currently serving in the military. Plus, you must have served at least 181 days of active duty, with other qualifications based on the type of military service.
V.A. loans do come with added fees that you’ll have to consider. There’s a one-time funding fee that ranges from 1.4% and 3.6% of the loan amount.
However, VA loans don’t require a down payment and come with lower closing costs than most other types of mortgages. You can also often avoid private mortgage insurance.
VA loans are available to bad credit borrowers with a credit score as low as 500. Whereas, some lenders low-rate conventional mortgagesrequire at least 620 credit scores to qualify for the loan.
Who Qualifies for A VA Loan?
- You’ve completed 181 days of active duty service during peacetime.
- You have been serving for 90 days during wartime.
- You have been in the National Guard or Reserves for more than 6 years, or after 90 days active duty service. Or have a disabilty discharge.
A USDA loan is another excellent way to get your feet wet in the world of mortgages. The U.S. Department Of Agriculture offers USDA loans with $0 down and low-interest rates, making it possible for you to buy a home that’s located in a rural area!
Most lenders will want a 640 or better scores for this type of loan. And you need to have specific income requirements for a USDA loan, too.
Many State and local government grants and down payment assistance programs are available to assist people with low credit scores. Check your area’s government website for more information on how you can get the assistance that suits you best!
Also, some non-profit organizations provide limited amounts of low down payment options.
How To Find Bad Credit Mortgage Loans
Many poor credit or bad credit borrowers find it difficult to get a mortgage loan. However, this is not an impossible task if you shop around and compare rates from different lenders before committing your future into any one lender’s hands!
Finding the best bad credit mortgage loans is especially important when faced with a poor credit history. A bad credit score makes finding an affordable loan with flexible conditions, such as a low down payment, challenging.
Compare different types of loans that come from other lenders, such as
- Online mortgage companies that specialize in bad credit loans.
- National and community banks
- Credit unions
Mortgage brokers work with mortgage lenders to help you find the best mortgage loan for you. They can compare rates and different loan options to find the best loan for you. However, they are not required to find you the best deal unless they’re acting as your agent under contract.
When you have bad credit, lenders may not give you a loan, or they might provide you with costly terms. Also, the available loan amount may be reduced.
The U.S. Department of Housing and Urban Development has made it easy for consumers to find lenders that offer FHA loans.
How To Increase Your Available Credit
Using these tips, you can improve your credit score even if it’s not perfect.
Make Loan and Bill Payments on Time
Start by paying every bill by its due date. Over time, your good payment history can increase your credit score.
Pay Down Debt
Debt can make your credit score worse. If you have lots of debt, you can pay it down. Which will reduce the debt-to-income ratio. That will help your credit score up. By following the snowball method, you would pay off your debts from smallest to largest. Otherwise, you could follow the avalanche method and pay off your highest interest accounts first.
Don’t Close Old Credit Card Accounts
When you pay off a credit card balance in full, resist the temptation to close the account. Keeping your older accounts open gives you a more extended credit history and a lower credit utilization ratio. Both of which can improve your credit score.
Stop Applying for Credit
If you’re constantly applying for new credit, it could be hurting your credit score. Every time you apply for credit, the lender makes a hard credit inquiry on your credit report. Too many hard inquiries can lower your credit score.
Correct Credit Report Errors
Go over your credit report with a fine-tooth comb and make sure all the information is accurate. If you find any errors, you can contact the credit bureaus to fix any errors on your report.
Pay For Deletions
Several companies will help you remove inacurate items from your credit report, for a fee, of course. This is something you can do yourself through the credit bureaus.
If you pay off a debt collection, it will fall off your credit report in 7 years. Sometimes, you can actually get this deleted sooner by paying the collection agency in full. That is, with their agreeing in advance to remove the debt collection report. However, the collection agency may not fullfill their part of the agreement. In which case, you have no recourse, unless you have a written agreement.
Stay Away from Hard Credit Inquiries
Many lenders provide free loan approvals with “no credit check”. Which really means they use an alternative method to check credit scores. This is known as “soft credit Inquiry”. It does not affect credit scores.
However, if you accept a loan proposal, the lender will conduct a “hard credit inquiry” which will lower credit scores. Lots of hard credit inquiries will lower your credit score, so be careful when applying for new lines of credit.
Find A Co-Signer
Is a median credit score not quite enough to get that dream home? You may be able to qualify for a home loan with the addition of your co-signer. Their income and assets will be considered alongside yours, bumping you over that credit threshold! This gives the lender more confidence in your ability to repay.
What Other Factors Do Lenders Review?
Your credit score is a crucial part of getting a loan. However, the lender will also look at other things, like:
Monthly Income, Debts, and Credit Utilization
Lenders want to know if you can afford to repay the loan. They’ll look at your income and debts to see how much money you have available each month to repay the loan.
A housing ratio or debt to income ratio should be 28% or less for a mortgage payment. Whereas total monthly debt obligations should be 36% or less. Which includes the mortgage payment and all other loan payments.
If you’re buying a home, the lender will want to know how much money you have saved up for a down payment. A lender will be more likely to approve your loan if you have a lot of money saved up. With a minimum down payment, you will need to pay private mortgage insurance premiums. If you make at least a 20% down payment, then you will not need to pay this.
Lenders like to see that you can repay the loan and still have money left over for something else (like savings or investments). They’ll look at your assets to see how much money you have available. Bank accounts, stocks, and bonds are considered assets.
Lenders also want to see that you have a good work history, so they’ll look at how long you have had your job. They may require that you must have worked in the U.S. on a full-time basis for at least two years in your current position.
What To Consider When Applying for a Home Loan with a Low Credit Score
If you have a lower credit score, then you should consider these things before applying for a home loan:
You won’t permanently damage your credit score: A home loan application shows as a hard credit pull on your credit report. This credit pull may affect your credit score for awhile.
Pick the low-interest rate: When interest rates are rising, the longer you wait to apply for a loan, the higher the interest rates and monthly payments will be. Likewise, when interest rate are dropping, the longer you wait could mean lower interest rates and monthly payments.
You may need a large down payment: A down payment is the amount of money you put upfront when you buy a home. A larger down payment (at least 20% on a conventional loan) will lower your monthly payments. Federal Housing Administration (FHA) loans are 3.5% or 10%.
Your lender may have stricter income or asset requirements: Your lender may want to see that you have other ways of repaying the loan in addition to your income. Your lender may ask for a lower debt to income ratio if you have a low credit score. Many lenders may also require moderate income borrowers to have more liquid assets to qualify for a loan.
You may end up paying more: Some low-credit score loan options have high payments. The better ones have lower payments to help you buy a house at a lower price. However, borrowers with lower credit scores or that only meet minimum credit score requirements will have higher APR rates.
Final Thoughts on Home Loans for Bad Credit
Bad credit home loans are possible. A person with bad credit can still enjoy homeownership. It’s never too late to get back on your feet. You might need to do a little more research when looking for financing from lenders who specialize in bad credit loans. When looking for a bad credit home loan, it’s important to remember that not all loans are created equal.
FHA and VA loans have better loan terms than conventional mortgages. Especially for moderate income borrowers.
Buying a home with bad credit is a challenge. However, by doing their homework and being proactive, borrowers can find a loan that meets their needs and gets them into the home they’ve always wanted. Home loans for bad credit are available – apply here.