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Low credit score home loans for first-time buyers

Low credit score home loans for first-time buyers

When it’s your first time trying something out, it can be easy to make mistakes. However, when it’s for something as serious as a home loan, it would be better to get it right on your first try because most of us don’t even have to go through this process again after a single experience.

Oftentimes, buying a house is a task that you cannot delay, so even if you might feel that you have a bad credit score, you have no other choice but to test your luck. Did you know, though, that you can get a home loan with just a 3.5% down payment even with a 580 credit score? It’s true! And this “home loan with bad credit” was even particularly written to aid first-time home buyers like you.

In this article, we’re going to get down on the mortgage basics that first-timers really need to know. We’re also going to help you shop around for mortgages more easily by listing down some of the options you may want to consider.

We hope that by the time you finish reading this today, we can take some of your worries away. Read on!

Mortgage Requirements

House keys

Mortgage loans are some of the biggest financial transactions people make in their lives. As a result, you usually need to be more financially stable when it’s your turn to make your own home loan decision.

These also present a great amount of risk for mortgage lenders, considering the amount of money they are letting strangers borrow. That’s why if you feel like the process is so stringent, it’s squeezing you down into a narrow hole, and there’s an excellent reason for this.

It’s still quite fresh in people’s memories, and it only seems like yesterday when the Global Financial Crisis went down, pushing thousands of people out of their homes and foreclosing thousands of properties. The culprit, they say, are borrowers who were allowed to take on mortgages they ultimately couldn’t afford. So making sure that you are approved for a home loan that’s truly right for you is very important, not just for your well-being but for the general health of the economy as well.

If you didn’t know it yet, lenders consider several factors to determine your mortgage eligibility. Let’s discuss these requirements briefly below.

History of Employment

A restaurant kitchen

Your loan payments will be taken from the income you will make, and for this reason, mortgage lenders will want to know how stable of a job you have. From your employment history, they’ll also tell what kind of income you make, like if your salary depends on commission, in which case, it can tell lenders that the money you make every month might not consistently be the same.

Debt-to-Income Ratio

It might sound fancy, but this term really means what the words imply.

Imagine that your income is a whole pie. Every month you cut this pie up, some of the slices can go to expenses; others might even go to your already existing debt. At the end of each month, what really matters to lenders is the still left slices with you.

This value, however, is represented as a percentage. The lower your debt-to-income (DTI) ratio, the lower the amount of debt you have to pay for every month. Borrowers with very low DTI ratios are desirable to lenders because they have a lot of disposable income to accommodate more debt.


Woman looking at piggy bank

Although there are indeed what we call zero-down payment mortgages, chances are you’ll have to make a down payment for the home loan you’ll get. This is why lenders will care about how much money you’ve been able to put away.

As you’ll learn further down in this article, the more liquid funds you have, the better because you might be able to avoid some fees that will make your mortgage more expensive.

Credit Score

Finally, as we’re sure you’ve already learned by now, your credit score is the make it or break it factor that will tell you just what kind of loan and/or benefits you can get when you need to buy a house.

For banks and other money institutions, credit scores are trust measures they can rely on to signal if an individual is a good borrower.

Are there really bad credit scores?

It is generally accepted that it is good and there is bad credit. After all, even the Fair Isaac Corporation, which created the FICO Score, defines what they think is excellent or poor credit. But today, we were hoping you could forget about such categories because when it comes to home loans in the U.S., there’s always a very good chance you can qualify for a mortgage because of the options we are so lucky to have.

Type of Mortgage according to Minimum Credit Score

FHA Loans

Aerial view of a suburb

According to FICO, credit scores below 670 are considered bad credit, and for this reason, some people might call a Federal Housing Administration (FHA) loan a mortgage with bad credit. This is probably because of the meager credit score requirements these home loans can ask for.

If you only have cash on hand that can pay for 3.5% of your home’s purchase price, then a minimum credit score of 580 will be good enough for an FHA loan. However, the true minimum credit score required to qualify for a mortgage is just a 500 FICO Score. However, take note that you lose the low down payment benefit with a score less than 580. This time, you’ll have to secure your loan with 10% cash on hand.

Conventional Loans

Conventional loans are the complete opposite of government-backed loans. And because the federal government does not insure these, you have to pay for private mortgage insurance if you cannot make a down payment of twenty percent.

Usually, only more experienced borrowers might prefer a conventional loan because lenders can often ask for much higher minimum credit score requirements despite the standard 620 FICO Score.

When it comes right down to it, mortgage lenders really have the last say on whether you can get approved for a loan since they have control over the money you’ll be borrowing. However, the more restricting credit score requirement can bring a lot of benefits for you in a low down payment and good interest rates.

VA Loans


The next government-backed loan we’re discussing after FHA loans are VA loans.

These mortgages are backed by the U.S. Department of Veterans Affairs, which is why mortgage lenders tend to give out the best interest rate for a VA loan. Its above-average advantages helped by recent legislation have helped push VA loans to the peak of their popularity in recent memory.

And we’re not kidding when we say just how fantastic VA loans are. As long as you are a military service member or veteran with a credit score of at least 640, you can qualify for this zero-down payment mortgage that has no loan limit!

USDA Loans

If you don’t qualify for FHA loans / VA loans, there’s still hope with a USDA loan.

This is a mortgage that the U.S. Department of Agriculture insures. You don’t have to be a farmer or someone who works in the agriculture industry to get approved. If you have a credit score as good as 640, and you are purchasing real estate in a rural part of the country, there’s a very good chance you can qualify for the USDA loan program.

However, there is actually no minimum credit score required to get approved for a USDA loan. If your credit score is lower than 640, you’ll be asked to explain your lower credit score, but your application will still be considered.

How to Improve Your Credit Score

Woman thinking at her workspace

At this point, you probably already have a good idea of the type of mortgage you can get approved for via the credit score you have. But we want to point out that there can always be steps you can take towards improving your credit. For example, maybe you need more space for your house, in which case, you’ll need to have a credit score of at least 620, or maybe only 80 points are standing in your way of making a 6.5% difference in down payment as in FHA loans. Whatever your circumstances, a better credit score can only make your life easier, so it will always be worth it to try increasing this number.

Here are some tips to improve your credit:

  1. Pay your bills on time because more than a third of your credit score is composed of your payment history alone.
  2. Check your credit report. Credit scores are based on credit history, so you want to make sure all those lines in your credit report only state the reality. If they don’t, you better get them corrected, and pronto!
  3. Avoid hard pulls on your credit. Whenever you inquire at a financial institution when you want to borrow some money, they can look at your credit history. And when they do this, your credit score can actually lose a few points. You can avoid this by lowering the volume of inquiries you make over a short period of time.
  4. Hustle some more! Because a little more dough is just a great thing all around. (Make sure you are still able to take care of yourself!)

Woman making the thumbs up sign

And that’s all for today, folks!

Remember, although there is such a thing as “bad credit,” this will never mean that you have run out of opportunities. Credit scores are really just numbers that change every time you request a look!

We hope you are now one step closer to fulfilling your American Dream. And even if you aren’t, you know where to call us.

You can do it!

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