Bad Credit Loans: How to Get a Mortgage With Terrible Credit



Tips For Getting a Mortgage With Bad Credit

Are you interested in buying a home for the first time but don’t have the best credit? Anyone can find themselves in a bad financial situation. Whether this is through their own mistakes or from a situation out of their control, it can lead to credit difficulties. Having a poor credit history will make getting approved for a mortgage more difficult. It won’t matter whether it is a construction loan to build your own home or a traditional mortgage to purchase a resale property.

Even though you may have more problems convincing a lender that you are an acceptable risk, it is still possible to get a bad credit mortgage. We show you what you can do to improve your ability to buy a home even with bad credit.

What is Bad Credit for a Mortgage?

How to Get a Mortgage With Bad Credit
How to Get a Mortgage With Bad Credit?

A low credit score or significant negative financial situation, like buying a home that went to foreclosure, could be a problem for lenders. So if you have gone through bankruptcy or foreclosure, this will hurt your chances of obtaining a mortgage. Even if your credit score is good, you will need to wait a couple of years or more before you will be considered eligible for a mortgage.

Lenders follow the guidelines set out by government agencies and government-sponsored corporations. These organizations have different FICO credit score requirements and waiting times for major negative credit events.

Credit information is reported to the three major credit bureaus including, Equifax, Experian, and Transunion. These agencies supply information to lenders who will be writing loans for those who are buying homes.

Let’s take a look at the types of loans you can get when your credit score is not the best.

Get an FHA Loan

To be eligible for a bad credit loan from the Federal Housing Administration, you need a credit score of 500, which will require a 10 percent down payment. To qualify for a lower down payment of 3.5 percent, you need a score of 580.

You need to wait a year after a chapter 13 bankruptcy and two years for chapter 7. There is a waiting period of 3 years for foreclosures.

Get a USDA Backed Mortgage

If you are on a low-income, a loan from the USDA with a score of 640 or even as low as 581, in some circumstances, will allow you to buy a home. The wait time after an adverse credit event is similar to the FHA.

A USDA loan is only available in rural areas. Generally speaking, the population to get a USDA loan needs to be under thirty thousand.

A VA Loan Could Be an Excellent Option

For active duty or veterans of the military, the VA offers a great deal. They don’t have official credit score requirements or down payment minimums, and they don’t need you to pay mortgage insurance either. Despite there being no set score requirement, lenders typically need 620 for VA loans.

If you have a bankruptcy on file, you need to wait the same amount of time as with the FHA. Foreclosures only need a 2-year wait, however, the lowest in this list. They do need you to be clear of tax liens and judgments, however.

In order to be eligible for a Veterans loan, you need to be serving or have served in the military. USDA and VA loans are two of the mortgages available with no down payment requirements.

Fannie Mae and Freddie Mac

Fannie Mae offers down payments as low as 3 percent if your score is 620 or more. They will require that you pay private mortgage insurance if you do put down less than 20 percent. This insurance protects them but it is expensive for you, and the lower the down payment amount, the more you will have to pay. You will be able to get rid of the PMI as soon as you get twenty percent equity in the property.

Freddie Mac has mortgages for people with scores of 660. For both government-sponsored organizations, you will have to wait at least two years after a bankruptcy has been discharged, and seven years for a foreclosure. If you have any tax liens or judgments against you, these will need to be paid entirely before you will be eligible.

Bad Credit Mortgage Interest Rates

If you have a bad credit history, you are going to be considered a more significant risk by banks. And with higher risk, the banks will charge more interest on your loan. Even a difference of a fraction of a percent will mean that you are paying thousands of dollars more throughout the mortgage.

Improving your credit score gives you a better chance of a lower interest rate from lenders.

Improving Your Chances of Getting a Bad Credit Loan

There are things you can do to improve your chances of getting the mortgage you want, even if you have terrible credit.

Increasing Your Down Payment

If you can do it, saving a more considerable amount of money for the down payment will increase your likelihood of being approved by a lender. While this may seem complicated, cutting back on your expenses and saving money into a bank account for the sole purpose, will improve your situation. Extra work and regular payments into this account will build your down payment, showing the lender that you are less of a risk.

Many people do not realize they can also get a down payment gift from a relative. Unfortunately, getting a down payment gift is not heavily promoted by lenders or real estate agents. It really should be mentioned as an option far more often.

Checking Your Credit Reports

If you haven’t checked your credit reports, you should. There could be things in the reports which aren’t correct and are doing damage to your score. The credit bureaus hold information on you, and if this is incorrect or out of date, it could harm how you look to lenders. Getting your credit report is easy and is free once a year from the three reporting agencies.

If something is wrong in your report, you can issue a dispute to the bureau. Once the problem is removed, your score should improve.

Credit Counselors or Credit Karma Can Help

While you might not know what to do to improve your score, even after reading your credit reports, a counselor will. They can look through the details of your financial history to turn around the direction your score has been heading. Another excellent option is using Credit Karma. One of the most beneficial features of Credit Karma when buying a home is to show you exactly how to build your credit score.

They will actually show you exactly how your credit decisions will impact your score. For example, what would happen if you closed out one of your credit card accounts? People do things all the time that unknowingly will negatively impact their credit situation. Credit Karma shows you what not to do!

Dealing with Debt

If you have debts, the lender will look at the ratio between those debts and your earnings. They take the debt amount, including the mortgage payment, and divide it by your monthly income.

If your debt-to-income ratio is too high, paying down the debt before applying for a bad credit mortgage is the way to go. You can also increase your income to improve the ratio.

Your track record of making payments on debts is also considered. If you frequently make late payments, this won’t be helping your situation. Get back on track with on-time payments for at least 3 or 4 months before you try for a loan.

Cosigners Might Be an Option

A cosigner on your loan might help you get a mortgage if they have a better credit score. However, this is a significant risk for them. If you miss any payments, their credit score will be damaged, and they will ultimately be responsible for the loan. Parents quite often will co-sign a child’s mortgage.

Final Thoughts on Getting a Mortgage With Bad Credit

Though finding a mortgage lender willing to help is more difficult when you have terrible credit, it is far from impossible. The worse the situation with your credit is, the higher the interest costs you can expect.

If you can take action to improve your situation, a mortgage application will stand a better chance of approval, and you can reduce your monthly payments as well.

Hopefully, you have found this information on getting a mortgage with bad credit to be helpful.

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  • Mortgage myths not to believe – learn about the most common things said about mortgages that just are not true. These are the most popular mortgage myths that need to be avoided.
Bill Gassett About Bill Gassett

Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys writing helpful articles for buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and here at Realty Biz News. He was the #1 RE/MAX agent in Massachusetts for 2018.