With a bad credit it is almost impossible to get a home loan approved. The key word here is “almost impossible” and that means there is a way for folks with bad credit to get approved for their home loan.
This guide will show you just about how you can go about getting your home loan approved with despite having an unappealing credit score.
Credit scores show the probability that you will be 90 days late on a loan payment. Mortgage lenders use the credit scoring company FICO to obtain your credit score. FICO grades your score between 300-850.
- 720 and above = Very Good
- Between 680 and 719 = Good
- Between 640 and 679 = Fair
- Between 580 and 639 = Poor
- 579 or less = Bad
Federal Housing Authority (FHA) Home Loans
Getting a mortgage in the past was a daunting task, in the sense that you had to have a combination of an attractive income and credit score with a minimum of 640 before your mortgage could be approved.
With such stringent rules in place, homeownership dropped, and home loans became difficult to qualify for, especially for first-time home buyers.
Then came the FHA mortgage loan, to turn everything around.
The Federal Housing Administration started offering government backed home loans with more reasonable qualifications as a way of increasing home ownership in the US.
The relaxed loan requirements made easier to get a government home loan, than the traditional mortgage and with government backing, lenders faced a reduced number of risks and were more open to potential homebuyers with less than desirable credit scores.
FHA Credit Requirements
FHA loans are insured and that means that they are a less risky proposition for lenders, and as such, lenders are able to apply leniency in some of the requirements.
- FHA loans allow for a 10% down payment for credit scores within the range of 500-579 and a 3.5% down payment for a score in the region of 580 and above.
- Prospective borrowers must show a steady work history, with at least two years of active employment.
- Homes being purchased with a FHA loan must be the borrower’s primary residence.
- An appraisal of the home must be conducted by an FHA approved appraiser.
- Foreclosures must be at least three years old and any bankruptcies must have been at least two years prior to loan application,
First-Time Homebuyers With Poor Credit
First-time home buyers are preferring to use the FHA loan as their home loan option rather than the conventional loan, as FHA loans are more lenient to low credit, and require smaller down payments.
Gift funds are also another option for down payment for FHA loans. The funds for the required down payment (3.5-10%, depending on your credit score) can come from either a friend, a family member, workplace benefit, down payment assistance programs, or other legitimate source, and it can make up 100% of the down payment.
Other Home Loan Options For Home Buyers With Bad Credit
VA Home Loans
If you are a veteran, you can qualify for a VA home loan – regardless of your credit history standing. The good thing about VA loans is that it comes with a lot of benefits such as no mortgage insurance and zero down payment.
There is no minimum credit score when it comes to securing VA Home loans. Although, most lenders require a minimum of 620 FICO score. There are some lenders that can approve a loan request with a score of 580.
USDA Rural Development Loans
The USDA Rural Development Loans were created by the US Department of Agriculture to bolster ownership of homes in rural regions within the country. These loans are tailored for low-to-moderate income earners.
An USDA eligible area isn’t just your typical farms and open roads as most people would assume. As much as 90% of the US is USDA eligible.
USDA home loans come with its own set of benefits such as no down payment, allowing you to fully finance the cost of the home. It is a great option for many, however, the credit score needed to acquire a USDA loan is a bit higher than FHA. A credit score of 640 is the minimum requirement for most lenders in regard to a USDA home loan.
Ways You Can Increase Your Low Credit Score
It is always helpful to have a good credit score before applying for a mortgage as it increases your chances. But on the other hand, if you have a low credit score there are a couple of things you can do to improve on it.
If you owe several debtors, you may want to consider a debt consolidation program to pay of your debt quicker and with a lower rate than you may be paying now. The following tips below can also help you raise your credit score for chance at approval for a mortgage:
- Acquire or switch to a secured credit card
- Dispute negative information
- Pay own all balances on your credit card
- Don’t miss any loan or credit card payments
- Limit your credit inquiries
- Ensure creditors delete collection accounts after you’ve paid them
Should I get my mortgage now, or wait till my credit score increases?
If you are faced with the above question, you might want to consider the following.
Home prices are increasing on a daily basis. The more you wait, the more you would have to pay in the future, and that means a higher monthly payment for you.
Interest rate may be come higher in the coming years. So, now is probably the right time to get a mortgage. The mortgage rates you get with bad credits may be very high, but it may be lower than the rates you will get in the future. And with so many possible loan options, if you are affording a rent payment similar to what a mortgage payment would be, its worth the shot to own your own home.