You Can Get a Home Loan With Bad Credit
Let’s talk about how to get a home loan with bad credit. Of course, buying a home with bad credit isn’t the best way to finance your property.
That being said, you will learn several financing options that are available for those of us with bad credit.
In addition, you will be informed of the many benefits of applying for home loans with great credit.
That’s just so you know all the money you can save.
One of the first questions I ask a potential credit repair client during a free credit consultation is “what are your credit goals?”.
Most people say, “I want to buy a house”.
Their obvious problem is that their credit is bad or not good enough to obtain a conventional mortgage loan.
Ideally, a 720 credit score or higher would be best for approval and low-interest rates that would save a person or family tens of thousands of dollars.
Are there any options if your median credit score is below 600 points? Yes.
Should you use them? That’s really up to you and depends on your situation.
This post will cover options that you may want to take advantage of if you have found your dream home but do not have good credit scores.
I have to get this off my chest so that it is clear where I stand on this. Just because you can get a home loan with bad credit doesn’t necessarily mean you should move forward with the purchase.
There are many factors to examine, you should definitely find a seasoned mortgage broker that has a great track record to help you make the right decision.
Start by doing your own research so you can get familiar with mortgage lingo and the many different types of mortgage products and programs.
Also, you need to consider whether or not it’s the right time for you to purchase a home, it will be the largest purchase of your life for most people.
Shop around to make sure you are getting the best deal for you and your family.
Buying a home can be a very beneficial investment when speaking in terms of growing wealth.
It can also be the single worst decision you make if you get a bad mortgage that you cannot pay.
The best way to protect yourself from defaulting and being over leveraged is to save up to 40-50% down payment.
During The Great Depression, the most devastating recession in U.S. history, homeowners with 40% equity and more did not go underwater on their mortgages.
When you pay 40-50% of the purchase price in a down payment, your monthly payment would be significantly low making your odds to repay the debt a high probability.
Putting down a 40-50% down payment may not be an option, if so, then consider not buying, it may not be the right time.
Challenges to repay a mortgage loan is a serious issue in general, most people are under 30-year terms, so think long term versus short term.
The Importance of a Great Credit Score
Having a great credit score is important when it comes to interest rates on home loans. The higher the credit score the lower the interest rate, the more tens of thousands you save.
Use our mortgage calculator to see how much of a difference the interest rate makes.
Below is an example of the savings you can secure with a great credit score versus a poor credit score.
MORTGAGE RATE TABLE
|Mortgage Amount $200,000||Mortgage Amount $200,000||Mortgage Amount $200,000|
|30-Year Interest Term||30-Year Interest Term||30-Year Interest Term|
|Interest Rate 3%||Interest Rate 4%||Interest Rate 5%|
|Monthly Payments $843||Monthly Payment $955||Monthly Payment $1,074|
|Total Payments $303,555||Total Payments $343,739||Total Payments $386,512|
|Total Interest Paid $103,555||Total Interest Paid $143,739||Total Interest Paid $186,512|
As you can see from the example above depending on your interest rate, the monthly payment, interest payments, and total payments vary tremendously.
With a 3% interest rate on a $200,000 mortgage your monthly payment is $843, total interest payments are $103,555, and total payment equals $303,555.
At 5% interest, for the same amount, you would pay $1,074 monthly payment, $186,512 in total interest payments, and $386,512 in total payments.
The savings are $231 in monthly payments, $82,957 in total interest payments, and $82,957 in total payments.
The debt is much cheaper when your interest rate is low, literally tens of thousands of dollars can be saved.
As mentioned before, ideally, you would want to have a 720 credit score or higher to have the best odds for approval.
Check Your Credit Scores
Now that you know the benefits of having a great credit score you know it is important to know your credit scores and what exactly good and bad credit is.
You can access your credit scores by using a credit monitoring service or by requesting your free annual credit report.
Here are some free and cheap sites you can use to access your credit reports:
$1 Trial Credit Monitoring Websites
Credit Bureau Websites
Once you have your credit reports and scores you will need to evaluate where you stand.
Lenders can vary on what they consider a good or bad credit score depending on the scoring model they use.
FICO Scores range from 300 to 850, and are divided into five score ranges:
- Very Poor: 300 – 579
- Fair: 580 – 669
- Good: 670 – 739
- Very Good: 740 – 799
- Exceptional: 800 – 850
Most lenders use FICO scores, some FICO 8 Scores, and fewer FICO 9 Scores, and some are starting to use Vantage Scores. Typically, they will use the median score of the three.
Lenders qualifying minimum credit scores can vary, but other requirements affect home loan approval as well, such as:
- The minimum down payment required
- The maximum debt-to-income ratio allowed
- The types of properties borrowers can use a mortgage for
- Minimum or maximum income allowed for a loan
- Origination and other lender fees
For Experian only, you can now boost your score instantly with Experian Boost. It’s free and it has increased scores for 67% of users. Sign up now to increase your Experian score now.
When Credit Scores are Too Low
For Conventional Home Loans?
Typically, when your scores are at or below the mid 600’s you will begin to run into trouble. Ideally, you want to be at 680 and up.
Of course, if you are lacking in other areas a good credit score will not land you approval for a home loan.
However, we are assuming the other qualifiers are in good standing and you are only lacking in the credit score department.
When you are at 650 or below you will lose interest from some lenders, and the ones still interested will charge you much higher interest rates that will increase your monthly mortgage payments.
If your scores drop below 620 your odds of being funded will decrease, even more, you should definitely expect high-interest rates if you find yourself in this position.
It will cause you to tens of thousands more in interest, which can lead to you potentially defaulting on the loan.
Home Loans for Bad Credit Applicants
Bad credit scores affect your ability to obtain a mortgage loan tremendously. However, there are several programs that are for such situations as bad credit.
Below are programs for home buyers with bad credit.
Bad credit mortgage lending programs:
- FHA Loan Program
- VA Loan Program
- USDA Loan Program
- Fannie Mae Home Ready Program
- Freddie Mac Home Possible Program
FHA Loan Program
The FHA Loan Program is something you probably heard of already. FHA stands for Federal Housing Administration. It’s the most commonly used program when it comes to home buyers with bad credit, small savings accounts, or both.
In 1934, Congress created the Federal Housing Administration (FHA), and it became part of the Department of Housing and Urban Development’s (HUD) Office of Housing in 1965.
FHA Loan Program provides mortgage insurance on home loans by FHA-approved lenders in the United States and territories owned by the US.
Mortgage insurance is provided for single-family and multifamily homes including manufactured homes and hospitals.
It is the largest insurer of mortgages in the world, with over 47.5 Million properties insured.
FHA Loan Requirements
To qualify for an FHA loan, borrowers must meet the following lending requirements:
- Must have a FICO score of 500 to 579 with 10 percent down or a FICO score of 580 or higher with 3.5 percent down.
- Must have a Verifiable employment history for the last two years.
- Income must be verifiable through pay stubs, federal tax returns, and bank statements.
- The loan must be used for a primary residence.
- The property must be appraised by an FHA-approved appraiser and meets HUD property guidelines.
- Your front-end debt ratio (monthly mortgage payments) ideally should not exceed 31 percent of your gross monthly income. Some lenders may allow a ratio of up to 40 percent in some cases.
- Your back-end debt ratio (mortgage, plus all monthly debt payments) should not exceed 43 percent of your gross monthly income. Lenders may allow a ratio of up to 50 percent in some cases.
- If you experienced a bankruptcy, you must wait 12 months to two years to apply, and three years for a foreclosure. Lenders may make exceptions on waiting periods for borrowers with extenuating circumstances.
FHA Loans allow you to purchase a home with sub-par credit and a low to moderate
VA Loan Program
The VA Loan Program much like the FHA Loan Program provides mortgage loan insurance. This program is for qualifying veterans only. The loan itself is issued by private lenders, like banks and mortgage companies and is guaranteed by the U.S. Department of Veterans Affairs.
In 1944 the VA Home Loan was created to help service members returning from war to purchase homes without needing any down payment or a great credit score.
VA Loan Requirements
To obtain a VA Loan, lenders and the VA require that:
- Applicant must be a veteran that served active duty and meets the veteran eligibility qualifications
- The loan must be for a qualifying purpose, such as a home for your family to live in
- In general, the applicant must live at the property and move in after the deal closes
- The applicant does not need a minimum credit score to qualify for the VA, that is up to the lender. Some require minimum scores, so you have to shop around
- The applicant must provide proof of substantial income to pay for mortgage and expenses.
- The applicant must meet the lender’s requirements for the debt-to-income ratio.
The VA Loan Program is for veterans only and can be a great resource to get a home with no down payment and sub-par credit scores.
It’s definitely a viable option to use to buy a home with bad credit if you are a veteran and qualify.
USDA Loan Program
A USDA Home Loan Program (a.k.a. USDA Rural Development Guaranteed Housing Loan Program by the U.S. Department of Agriculture) helps home buyers in rural and suburban areas.
The USDA Loan is another zero down mortgage for rural and suburban home buyers.
There are three types of loans the USDA Loan Program offers; guaranteed loans, direct loans, and home improvement loans and grants.
Depending on your situation, one of the loans may be a great option for you.
Guaranteed Loans are similar to both FHA and VA loans, the USDA provides insurance on participating local lender’s loans.
You can get these loans with little or no down payment, however, if that is the case you will have to pay a mortgage insurance premium.
The interest rates are low as well and do not require excellent credit scores, although the lender sets credit score requirements as they see fit.
At most lenders, a 640 credit score is required for automatic approval.
Direct Loans are issued by USDA for home buyers with low income. Minimum income requirements vary by region and are determined by lenders.
Interest rates for direct loans can be as low as 1% with subsidies.
Home Improvement Loans and Grants are exactly what they sound like. These are loans and grants issued by USDA to help homeowners make repairs or upgrades on their properties.
This program can provide up to $27,500 when both the loan and grant are combined.
USDA Loan Requirements
Here are the USDA requirements:
- Must meet the income limit requirements
- Must be a U.S. citizen, non-citizen national or qualified alien
- The property must be your primary residence
- Must show an ability to meet debt obligations
- The property must be in an eligible location
- Must work with a USDA-approved lender
- Must have a qualifying credit score for the loan, preferably 620-640 or higher, may be lower, depending on the lender
The USDA Loan can be very helpful if you are buying in the right location, which would be a rural or suburban area.
Fannie Mae HomeReady Program
Fannie Mae’s HomeReady Loan Program offers low to medium income homebuyers an opportunity to purchase or refinance a property.
HomeReady loans have low down payment and mortgage insurance requirements and are more flexible when it comes to allowing contributions from other people.
HomeReady Program Requirements
Fannie Mae HomeReady Loan Program requirements:
- Must have low to moderate income
- Must be first-time or repeat homebuyers
- Must have limited cash for down payment
- Must have a credit score ≥ 620; borrowers with credit scores ≥ 680 may get even better pricing
- Must have a supplemental rental income
- Are looking to purchase or refinance
The HomeReady Loan Program offered by Fannie Mae is not the best for bad credit scores per say, however, it’s still a great option for homebuyers that have low income, which is why I included it.
Freddie Mac Home Possible Program
The Freddie Mac Home Possible Program is a first-time homebuyers mortgage program that allows borrowers to pay a low down payment as low as 3%-5%.
This program also features reduced private mortgage insurance (PMI) that can be dropped once you have 20% equity in the home.
Home Possible Requirements
Here are the Freddie Mac Home Possible requirements:
- Must meet debt-to-income ratio requirements, which requires that only 43% to 45% of your gross income can go to your monthly debts, the ratio can be higher
- Income must fall inside of the stated guidelines, which are based on the location of the home, usually, an applicant can not make more than the median income unless the location is underserved, then making over the median is allowed
- Must be a first-time homebuyer, if not, you can not have been on a mortgage or title for a property within three years of applying for the Home Possible Loan to qualify or to be considered as a first-time buyer.
- One buyer must complete an approved Freddie Mac homebuyer education course before the loan closes; you may take the course online or in person
This program allows you to put down a very low down payment, pay less on the PMI, and generally requires a 620 credit score. However, some lenders may allow lower credit scores.
Buying a home with bad credit can be a challenge, but it is not impossible. There are several programs out there for you to take advantage of. You just have to do your homework and work with your local lenders to find the best solution for your situation.
Some of the programs are better than others credit score-wise, and they all have favorable down payments, while some offer little or no PMI payments, which is a major plus.
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