Getting a Mortgage to Buy a House With Bad Credit
Can I buy a house with bad credit? Are bad credit home loans available? If you are asking these questions, you’re not alone.
Many people who are interested in purchasing a house want to know the minimum credit score requirement.
Getting a home loan with bad credit is challenging but not impossible.
Buying a home can, at times, be a difficult process, but if you have bad credit, things can seem a lot worse. While it is easy to think that you can’t buy a house with bad credit, you may have more options available to you than you realize.
You can get bad credit loans for homes to make it easier when your financial situation isn’t perfect. We will show you that you can improve your credit score and how to get a mortgage with bad credit.
While you will likely pay a higher interest rate, overtime working on improving your poor credit score will ultimately lead to a lower rate and better terms. In the past, I’ve covered buying a house with a low income that carries similar characteristics.
Let’s take a deep dive into loan programs for buyers with low credit scores. You’ll love these tips on using bad credit home loans when buying a house.
What do Lenders Consider a Bad Credit Score?
Whenever you approach mortgage lenders, you might be surprised to learn that they don’t have a set minimum score requirement.
When you apply for a traditional mortgage loan, the lender can set whatever minimum credit score they want. However, with most conventional mortgages, the acceptable credit score range will be similar.
You can speak with a mortgage broker to get an idea of what to expect from certain lenders before submitting a mortgage application.
Even with government-backed mortgages through programs run by the FHA or the VA, they can still set their own requirements. Though since these government-backed programs give them some guarantees, the requirements tend to be a lot lower.
However, if your credit score is around 500 or less, it is advisable to improve your score before you consider applying. If you don’t know your credit score, you really need to make sure you understand it before you apply for a mortgage.
Here is a breakdown of the FICO score model:
- Excellent credit score = 800-850
- Very good credit score = 740-799
- Good credit score = 670-739
- Fair credit score = 580-669
- Bad credit score = 300-579
Working on your credit score is always a good idea, as it will lead to a lower interest rate not only on your home purchase but for all other loans and credit cards. An average credit score for most borrowers is around 710. Having perfect credit is unusual.
Is It Really Possible to Buy a Home With Bad Credit?
Closing on a house when you have terrible credit is difficult but not impossible.
If you have a credit score that is lower than 670, you will be considered to have bad credit based on the FICO scale.
A more accurate definition of the score ranges would be; 300 to 579 is considered poor, while 580 to 669 is given a fair rating. Obviously, the first thing to focus on would be to obtain a good credit score.
But it isn’t only your credit score that is important. Lenders consider several different things when approving your loan application.
If you have a low amount of debt or no debt at all, this will help. Higher-income is going to be better than lower income. If you can afford to pay a higher down payment, that will make a big difference.
If you haven’t kept up with your payments for other loans, and a debt collection agency has got involved, this won’t be in your favor. Late payments can really whack your credit score unfavorably.
Out of these factors, the down payment is probably the most important. A larger down payment amount can still help you buy the home you want, even with a low credit score.
Mortgage Lenders Have Different Loan Standards
When you are looking to choose a lender, you have to remember that they don’t all have the same requirements.
What might prevent you from getting the mortgage you need with one lender might not be such an issue for another. It will be essential to shop around, and you may want to include local credit unions in your search. Often they can be somewhat flexible.
When getting bad credit loans for homes, you can expect to pay more interest, leading to higher mortgage payments.
With a lower credit score, you are always likely to pay more interest on the mortgage due to higher rates. Lower scores will push up the overall cost you pay throughout the loan and add to your monthly payment.
However, if you find yourself in this situation, you can always refinance your mortgage later on. If you have a better credit score and are in an improved financial situation, you should get better terms when refinancing.
Most people will seek to get rid of the higher mortgage rates as soon as possible.
What Home Loans Are Available When You Have Bad Credit?
With bad credit, you can choose from two main types of mortgages; government-backed loans and conventional loans. So, which bad credit loan is best?
The federal government insures Government-backed loans, and with less of a risk to the lender, they have low requirements for the downpayment and your debt to income ratio.
With conventional loans, this isn’t the case and so may be more restrictive in their requirements.
Let’s look at the different government-backed programs and what they offer. These are among the most popular programs for first-time buyers. They are also among the most popular types of home loans when you have lousy credit.
Bad credit home loans can be used for first-time home buyers or for those who have owned a house before. Let’s review the mortgages for buyers with low credit scores.
The Federal Housing Administration operates a loan program for first-time buyers. It is known as an FHA mortgage. If you haven’t purchased the home in the last 3 years, you could also qualify as a first-time homebuyer.
This loan type can allow you to purchase with a credit score as low as 580, depending on the lender. You might still be able to get a loan through this program with a score above 500 if you can pay a 10% downpayment.
The FHA loan program is one of the most popular among first-time homebuyers. Not only is it attractive for borrowers who have a lower credit score, but you only need a 3.5% down payment.
The one downside of an FHA loan is that you will pay a mortgage insurance premium. FHA lenders use mortgage insurance premiums to protect against a high-risk borrower who is more likely to default on a mortgage.
All in all, FHA loans are one of the best mortgage programs when you have bad credit and want to buy a home. With FHA loans, seller concessions can also be a maximum of 6% toward closing costs which can be helpful with cash strapped borrowers.
When thinking about home loans for bad credit, think FHA.
The U.S Department of Agriculture could be another possible option if you are buying a home in certain rural areas. This allows you to purchase without the money saved for a downpayment. However, you will be expected to have a credit score of 640 or more for this type of loan.
It will only be possible to utilize this mortgage program when buying a home in a rural area. There are population requirements to be able to use this type of loan. You can see the population guidelines on the USDA mortgage website.
The Department of Veteran Affairs also operates a program to help home buyers. If you are currently or have been an active duty member of the military, you could qualify for their program.
The VA loan is attractive with a 0% downpayment and other benefits like no private mortgage insurance (PMI). While they don’t have specific credit score requirements, you will probably need a score of 600 or more, though this is up to the lender.
If you have served or are serving the country, a VA mortgage is a home loan with bad credit worth exploring.
If you don’t qualify for any government-backed programs, you can still get a conventional loan with bad credit. Your credit score will probably need to be higher. Think 620 or more.
If you have a better income or can pay a higher down payment, a conventional loan could be a better option. If you can meet those requirements, you could even get away with a lower credit score.
Conventional loans are the most common financial products and conform to Fannie Mae and Freddi Mac standards. Both Freddie Mac and Fannie Mae are government-owned entities that buy mortgages from lenders. They can either hold them or turn them into mortgage-backed securities.
Using Hard Money Lenders Might Be Your Only Option
Sometimes when you have run into serious financial difficulties, the only way to get a loan is through a hard money lender. If your credit score is horrible, this is where a hard money lender would need to be utilized.
A hard money loan is given through private money lenders. They are considered personal loans for bad credit.
Hard money loans are used as last-resort loans for the purchase of real estate. The bad news with hard money lenders is that you will pay substantially higher interest rates. Hard money loans are not given by banks but by individuals.
The good news is the life of the loan is short-term. It is the type of mortgage that gives you some time to get yourself on your feet financially.
Once a borrower’s credit score improves, the loan can then be refinanced by a traditional mortgage lender.
Using a private lender is the worst-case scenario for purchasing a home with awful credit. For some, it may be their only choice.
Bad credit loans are very costly so it’s prudent to get rid of them as quickly as possible.
Improving Your Credit Score is Key When Buying a House
If you have a high credit score, you will have more options for a mortgage. With a credit score lower than 500, you will likely have to make big improvements before you can consider buying a home.
If you have a score under 600, you are probably limited to an FHA loan, which otherwise might not offer the best deal.
Raising your credit score above 600 opens up more possibilities and means you have to pay less in the long run.
If you have a better understanding of how credit scores are calculated, you should find improvements you can make to your own situation. Though if you have gone through bankruptcy, it doesn’t matter what your credit score is. Lenders won’t consider you for a loan for a couple of years.
One of the better financial tools you can use for free is Credit Karma. The best way to increase your scores quickly is by using their services. They will show you exactly what you need to raise your bad credit score.
How Credit Scores Are Calculated
Credit bureaus use the following factors to calculate your score.
Your Payment History
Do you always pay your bills on time? If you don’t, this will have a serious negative effect on your credit score. Payment history makes up around 35% of the credit score rating, so paying your bills on time is an important way to have a good credit score.
Up next and making up around 30% of your credit score is how much of your available credit you are using. This is known as your credit utilization ratio, and the higher your utilization, the more negative pressure it puts on your score.
In order to get stellar credit, it will make sense to work on this aspect of your finances. By keeping your credit card debt low, you can really improve your scores.
Average Age of Your Accounts
How long have you owned your credit accounts? The older your accounts are, the better, with this factor making up 15% of the score. This makes it beneficial to hold onto older accounts and not close them even if you don’t use them anymore. However, if you only have very new accounts, there isn’t much you can do about it.
Newer credit accounts harm the average age, and it also means that a hard inquiry has been made on your credit report. Any less than 6 months old credit is likely to be considered new credit, which can account for 10% of your score.
The mix of different types of credit counts as 10% towards the score. If you only have one type of credit, that isn’t great. They want to see a range of different credit, like credit cards, car payments, and other types of loans.
How to Quickly Improve Your Credit Score
If you have bad credit, you can do a few things to turn the situation around. Though it can be done fairly quickly, you could need a few months to see results.
It’s worth it though given how costly a personal loan for bad credit can be.
Improving Your Credit Utilization
If you can either get more available credit or pay down your credit balance, you will improve your utilization. Since this makes up a large part of your score, it should have a positive effect fairly quickly.
It isn’t a great idea to apply for a new credit account because of a hard inquiry on your report, and it will bring down the average age.
However, you can ask your credit card provider to increase your credit limit to produce a similar effect. This type of request is unlikely to result in a new inquiry on your credit report, no matter how many increases you request.
Avoid Hard Inquiries on Your Credit Report
When you apply for new credit, a hard inquiry will be added to your credit report with the bureaus. This will lower your score for a while and is something the lenders don’t like to see. It is seen as an indication that the borrower is desperate for credit, and unsurprisingly that rings alarm bells for lenders.
If you do need to work with a lender, you could ask if what you want will result in a hard inquiry or not. That way, you can avoid problems when you are looking to apply for a mortgage.
Adding a Lot of New Accounts
If you need to increase the available credit to improve your utilization, applying for new accounts is an option. While this will lead to hard inquiries, they won’t stay on your credit report forever.
If you add many new accounts at around the same time, they will drop off your report together, and your score will bounce back. Only this time you will have better credit utilization, so your score will be higher. You can also use these accounts to add more to your credit history.
Thanks to the hit from the inquiries, you shouldn’t do this immediately before applying for a mortgage. It can also take 1 to 2 months for the effects of adding more credit accounts to show themselves in your score.
If you have a collection on your credit report, lenders aren’t going to be convinced you’ll be a reliable borrower. The collection shows you haven’t paid back the money you owe and haven’t attempted to deal with the debt.
When you do pay off the collection, it still can remain on your report shown as paid. While this is better than having outstanding debt, it isn’t ideal.
To avoid this problem, you can ask to have the collection removed from the report when you pay the debt. This should remove all traces of the problem and so won’t affect a lender’s decision. If this will help your credit score, you should ask to have this agreement made in writing so you can make sure it is removed when you pay.Home loans with bad credit are more challenging to get, so you need to do your part.Click To Tweet
Be Vigilant About Removing Credit Report Errors
One often overlooked aspect of improving your credit score is checking your credit reports for errors. Credit reporting mistakes can have a significant impact on making a bad credit score even worse. Identity theft can be a culprit as well for tanking your scores.
If you are in the process of buying a home and have recently fixed credit reporting errors, you can ask the credit bureaus for what is referred to as a rapid rescore. If you need a minimum credit score to buy a home and you’re just below it, the rapid rescore can help.
It’s worth noting doing the rapid rescore can be helpful when renting to. It could take you out of the no-credit-check apartment category.
Best Mortgage Lenders Who Specialize Low or Bad Credit Home Loans
You may be wondering where to get bad credit loans or if there are lenders who specialize in low or bad credit home mortgages. The answer is YES. The following lenders would be worth speaking with when you don’t have the best credit score and wish to purchase a home.
- Rocket Mortgage
- Quicken Loans
- Navy Federal Credit
- New American Funding
- BNC National Bank
- Network Capital
If you are trying to find a bad credit lender nearby do a Google search. Try bad credit loans near me for the best results.
All of this should have given you a better idea of how to get a mortgage with bad credit. While it can seem like an uphill struggle to buy a home if you have problems with your credit, you do have options. Working on keeping low debt really can help.
If you take the trouble to do the work that will improve your credit, you put yourself in a better position to get the loan and lower interest rates.
Even with improvements to your credit, an FHA loan might be your best option. This will let you own your own home with a score as low as 500 if you can save 10% of the purchase price for a downpayment.
Even if you have a score over 600, it will pay you to improve since better credit scores benefit from lower interest rates and a lower downpayment requirement.
If you are planning to buy a home, start getting serious without improving your financial situation. Hopefully, you have found the information provided on getting a mortgage with bad credit to be useful.
About the author: The above Real Estate information on home loans for bad credit was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at firstname.lastname@example.org or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ years.
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