If you've been finding it hard to choose a mortgage, you're not alone. Home loans…
Most people think it’s impossible to get a home loan with bad credit. But then, there are many available loans for bad credit borrowers and people who are working on improving their credit scores to qualify for a loan.
Getting a Home Loan with a ‘bad credit score
Your credit scores qualify you for a certain amount for your home loan. Lenders look into your credit score to gauge risk and evaluate whether you can repay their loan. The better your FICO score, the less you can expect to pay for your home loan.
What is considered a ‘bad credit score?
FICO scores can have the following rating:
- Exceptional – 800 or higher
- Very good – 740 to 799
- Good -670 to 739
- Fair – 580 to 669
- Poor – 579 or below
Mortgage lenders consider FICO scores that are ‘fair’ and ‘poor’ as ‘bad’ credit scores. Borrowers with low credit scores may have to pay higher interest rates and make a higher monthly payment.
Is there a minimum credit score to qualify for a home loan?
The short answer here is no. Any lender requires no specific minimum credit score to buy a house. The minimum credit score requirements to qualify for a mortgage will ultimately depend on your lender. In this case, it’s better to look into and know what lenders are looking for and requiring. These may include the following:
- Minimum down payment required, or how much do you have available for a down payment.
- Maximum debt-to-income ratio allowed of if you have an overall low amount of debt/have any debts in collection
- Types of properties borrowers can use a mortgage for
- Minimum or maximum income allowed for a loan or how much income you have
- Other lender fees
How to Get a Home Loan with a Lower Credit Score
Applying for a mortgage loan may be a bit more difficult for borrowers with low credit scores. These are some ways people with poor credit can consider when getting mortgage loans.
- Seek other home loan options
- Keep an eye out on mortgage rates
- Make a larger down payment
- Find ways to lower your credit score
Buying a House with Bad Credit and No Money Down
There are different ways a person can buy a house with bad credit and no down payment.
#1 Explore ‘Bad’ Credit Home Loans
The home loan options available today are plentiful, each with its advantages and disadvantages. Aside from the “traditional” home loans, there are other loan programs that people with bad credit can look into, namely conventional and government-backed loans.
Conventional loans are not insured by the government and are instead backed by private lenders. This type of loan is a popular loan option because it offers borrowers more flexibility. Although this gives borrowers with bad credit more options, it is also riskier because the U.S. government does not back it.
Conventional loans are typical because of their low-interest rates, fast loan processing, diverse down payment options, and reduced Private Mortgage Insurance (PMI).
Conforming Conventional Loan
Conforming conventional loans must follow the guidelines set by Fannie Mae (short for Federal National Mortgage Association) and Freddie Mac (short for Federal Home Loan Mortgage Corporation), which are government-sponsored enterprises that purchase mortgages from lenders. The vital thing to note about conforming to conventional loans is the loan limit. This baseline is the maximum amount you can borrow from your lender.
Nonconforming Conventional Loan
Nonconforming conventional loans exceed the loan limit; Fannie Mae and Freddie Mac do not purchase these loans. Private lenders and private institutions fund these loans.
Federal Housing Administration Loans (FHA Loans)
The Federal Housing Administration issues FHA loans. This kind of loan will work best for first-time homebuyers and people who haven’t purchased a home in 3 years. You can put as little as 3.5% down in an FHA loan, making it a more affordable option than conventional loans, which require a 20% down payment. If you happen to have a family who wishes to pay for your down payment, FHA loans will allow that. Aside from down payment, people with lower credit scores are more likely to be approved for FHA loans because of loose acceptance guidelines.
To qualify for an FHA loan, you typically have to follow these requirements:
- A credit score of at least 500
- A debt-to-income ratio of 50% or less
- 3.5% down payment for credit scores 580 or higher
- 10% down payment for credit scores 500-579
- The house must be your primary residence and meet the FHA’s property requirements.
If you don’t meet these requirements, the FHA may still consider your loan. In these cases, they will conduct a manual underwriting, where they will closely inspect and review your loan application.
U.S. Department of Agriculture Loans (USDA Loans)
The U.S. Department of Agriculture backs a USDA loan. This type of loan is best for individuals and/or families looking to buy a home in some rural regions with a 0% down payment required.
Veteran Affairs Loans (VA Loans)
Veteran Affairs Loans are insured by the Department of Veterans Affairs, allowing any existing service members, veterans, and surviving spouses to buy a home with a 0% down payment. To qualify for this loan, you will need a debt-to-income (DTI) ratio of 41% and better. VA loans do not have a minimum credit score requirement.
#2 Improve Your Score
With the different home loan options available, that doesn’t mean that you shouldn’t work on improving your credit score. You will be able to save with interest payments and gain more mortgage options, helping your future self in the home-buying process. Here are some things you can do to get a better credit score.
Check Your Credit Reports
It’s up to consumers to monitor their credit reports for any inaccuracies in the information. Should there be any inaccurate information, it will take some time to process the changes. The sooner you attend to them, the less likely you’ll get a negative shift in your credit score.
Pay your Bills
Paying your bills on time is a crucial determinant of your credit score, and your payment history makes up around 35% of it. If you’re able to make your payments on time and meet the minimum amount to earn a good credit score, it shows that you are capable of paying your debts on time. This will help the lender see that you’re able to handle your financial obligations responsibly.
The same applies to paying your credit card bills on time and working on your utilization ratio. The higher the utilization ratio, the more likely you’ll hurt your credit score. As much as possible, you would want to lower the amount of credit you’re currently using. It is recommended to keep your credit usage under 30%.
Do Not Open New Accounts
Opening new accounts can lead to many inquiries on your credit report. Opening new credit cards may hurt your credit score in the future because to lenders, it will appear that you are desperate for credit.
Become an Authorized User
You can become an authorized user on someone else’s account. If you know any family member who has credit accounts and well-established credit history, you may ask to be an authorized user of their performance. This will help boost your credit, especially if they make timely payments.
#3 Co-Sign with Another Home-Buyer
Co-signing with another person can help you manage the finances of buying a home. This is an excellent option for people who need extra help to finance and get a mortgage loan. This option, however, comes with risks. If either you or your co-signer misses a payment, this may affect their credit score.
Can I borrow against my house with bad credit?
For borrowers with bad credit, you are more likely to be approved by a lender for a home equity loan. This is what most people know as a “second mortgage.” In a home equity loan, you set your home as collateral. This proves to the lender that you are more likely to pay back their loan, and they see you less as a financial risk. Home equity loans allow property owners to borrow against a home, which has a debt-free value.
In a home equity loan, your mortgage lender lets the buyer “borrow against” the equity in a home. This means that you will be paying an additional amount on top of your current mortgage payment. The most significant disadvantage to applying for a home equity loan is that you risk your home’s foreclosure if you cannot meet your monthly expenses.
The Best Mortgage Lender for Bad Credit
Finding the best mortgage lender if you have bad credit can be a struggle. You have to consider your priorities and financial capabilities and properly plan out how you will finance your home. With the many available mortgage lenders out there, the hunt for the best lender can get overwhelming. If that’s the case, it’s better to leave it up to trusted professionals.
With Home Lending Pal, you have your very own Intelligent Mortgage Advisor. After signing up and filling in your information, Home Lending Pal will do the dirty work and find which mortgages you qualify for. You will be presented with the best mortgage options tailored to your needs and finances, uncover hidden mortgages and closing costs, and identifies lenders that will lend to you. Once you’re ready, you’ll be able to contact your lender and proceed with the house-buying process. Get started and learn more about Home Lending Pal at https://www.homelendingpal.com/.