Getting a Loan For a Home 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 interested in purchasing a house want to know the minimum credit score to buy a home.
Getting a home loan with bad credit is challenging but not impossible.
Buying a home can sometimes be difficult, but things can seem worse if you have bad credit.
While it is easy to think you can’t buy a house with bad credit, you may have more options 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 how to improve your credit score and 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 with similar characteristics.
Let’s examine 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?
When you approach mortgage lenders, you might be surprised 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, the acceptable credit score range will be similar to most conventional mortgages.
Before submitting a mortgage application, you can speak with a mortgage broker to understand what to expect from specific lenders.
Even with government-backed mortgages through programs run by the FHA or the VA, they can still set their requirements. Though since these government-backed programs give them some guarantees, the conditions tend to be a lot lower.
However, if your credit score is around 500 or less, improving it before you consider applying is advisable. If you don’t know your credit score, you must understand it before applying for a mortgage.
You can get your credit score and report for free from AnnualCreditReport.com once a year. There are other methods to get a free credit report copy.
What is The FICO Scoring Model?
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.
The average credit score for most borrowers is around 710. Having perfect credit is unusual. Knowing a good credit score is essential when getting a home loan.
A good score will give you the best interest rate on a mortgage.
Is It 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 lower than 670, you will be considered 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.
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 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 whack your credit score unfavorably.
Out of these factors, the down payment is probably the most important. A larger down payment can still help you buy the home you want, even with a low credit score.
Mortgage Lenders Have Different Loan Standards
When choosing a lender, remember they don’t all have the exact 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.
You can expect to pay more interest when getting bad credit loans for homes, 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 increase your overall cost throughout the loan and add to your monthly payment.
However, if you find yourself in this situation, you can refinance your mortgage later. If you have a better credit score and 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?
Understanding how to buy a house with bad credit means knowing your loan options.
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 risk to the lender, they have low requirements for the downpayment and your debt-to-income ratio.
This isn’t the case with conventional loans, so their requirements may be more restrictive.
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 those who have owned a house.
Let’s review the mortgages for buyers with low credit scores.
FHA Loans
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 three years, you could qualify as a first-time homebuyer.
Depending on the lender, this loan type can allow you to purchase with a credit score as low as 580. 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 more likely to default on a mortgage.
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.
USDA Loans
The U.S. Department of Agriculture could be another option if you buy a home in some rural regions. 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.
Utilizing this mortgage program when buying a home in a rural area will only be possible. There are population requirements to be able to use this type of loan.
You can see the population guidelines on the USDA mortgage website.
VA Loans
The Department of Veteran Affairs also operates a program to help home buyers. If you are currently or have been an active duty military member, you could qualify for their program.
The VA loan is attractive with a 0% down payment 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. Many borrowers who can utilize a VA loan will do so to avoid paying PMI.
Conventional Loans
You can still get a conventional loan with bad credit if you don’t qualify for government-backed programs. Your credit score will probably need to be higher. Think 620 or more.
A conventional loan could be a better option if you have a better income or can pay a higher down payment. If you 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. Freddie Mac and Fannie Mae are government-owned entities buying mortgages from lenders.
They can either hold them or turn them into mortgage-backed securities. Bad credit borrowers must remember they will pay private mortgage insurance (PMI) with conventional loans.
Using Hard Money Lenders Might Be Your Only Option
Sometimes when you have 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 to purchase 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. This type of mortgage gives you some time to get yourself on your feet financially.
Once a borrower’s credit score improves, the loan can 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 getting rid of them quickly is prudent.
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 significant improvements before considering buying a home.
If you 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 must pay less in the long run.
If you better understand how credit scores are calculated, you should find improvements you can make to your 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.
Credit Karma is one of the better financial tools you can use for free. The best way to increase your scores quickly is by using their services. They will show you precisely 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 consistently pay your bills on time? If you don’t, this will have a severe negative effect on your credit score. Payment history makes up around 35% of the credit score rating, so paying your bills on time is a crucial way to have a good credit score.
Credit Utilization
Up next and making up around 30% of your credit score is how much of your available credit you use. This is your credit utilization ratio; the higher your utilization, the more negative pressure it puts on your score.
Working on this aspect of your finances will make sense to get stellar credit. By keeping your credit card debt low, you can 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.
It is 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.
New Credit
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 six months old credit is likely to be considered new credit, which can account for 10% of your score.
Credit Mixture
The mix of different types of credit counts as 10% of the score. If you only have a kind 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 improve the situation. Though it can be done relatively quickly, you could need a few months to see results.
It’s worth it, given how costly a personal loan for bad credit can be.
Improving Your Credit Utilization
You will improve your utilization if you get more available credit or pay down your credit balance.
Since this makes up a large part of your score, it should have a positive effect reasonably 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 indicates that the borrower is desperate for credit, and unsurprisingly, that rings alarm bells for lenders.
If you need to work with a lender, you could ask if what you want will result in a hard inquiry. 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 around the same time, they will drop off your report together, and your score will bounce back.
Only this time will you 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.
Removing Collections
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 won’t affect a lender’s decision.
If this will help your credit score, you should ask to have this agreement made in writing to ensure 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 TweetBe 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. 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
- Citibank
- New American Funding
- BNC National Bank
- Homebridge
- Network Capital
If you are searching for a bad credit lender nearby, do a Google search. Try bad credit loans near me for the best results.
The Alternative Method of How to Buy a House With Bad Credit is a Co-Signer
When you want to buy a house with bad credit, one of the best options may be finding a co-signer for the loan.
A co-signer will allow the mortgage lender to use another person’s excellent credit standing to help you qualify.
It is possible you can get a more significant loan, even with bad credit, when someone is vouching for repayment.
By having a co-signer, the debt-to-income ratio the lender looks at will improve.
On most occasions, the lowest median score of the loan borrowers is considered by lenders. Lenders can average the scores if multiple borrowers get a mortgage backed by Fannie Mae.
Taking advantage of a co-signer is often the difference in getting approved.
Most of the time, the lowest median credit score of all borrowers on the loan is the one that counts. However, if multiple borrowers are getting a loan backed by Fannie Mae, the guidelines allow lenders to average the median scores of the borrowers.
This can mean the difference between qualifying or not getting the loan.
For instance, if you have a median credit score of 550 and your co-signers is 750, up until recently, both incomes would not have been sufficient for securing the loan.
Nowadays, Fannie Mae’s policy is to average the scores and arrive at 650, enabling borrowers with such figures to obtain financing.
A home loan for bad credit may not be necessary when you can find someone willing to put their neck on the line.
Final Thoughts Bad Credit Loans For Homes
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 have options.
Working on keeping low debt 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 home with a score as low as 500 if you can save 10% of the purchase price for a down payment.
Even if you score over 600, it will pay you to improve since better credit scores benefit from lower interest rates and a lower down payment requirement.
If you plan to buy a home, start getting serious without improving your finances. Hopefully, you have found the information on getting a mortgage with bad credit helpful.
About the author: Bill Gassett, a nationally recognized leader in his field, provided the above Real Estate information on home loans with bad credit. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for 37+ years.
Are you thinking of selling your home? I am passionate about Real Estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
