Many home buyers remember the housing collapse and mortgage crisis of 2008. Up until that time, anyone with a social security number could get a mortgage regardless as to whether they had bad credit or even a job. Soon after, those mortgage options disappeared leaving few options for individuals with bad credit.
Now that the dust has settled, there are a few subprime mortgage lenders offering unique niche programs for individuals who have poor credit or have had a recent credit event such as a bankruptcy or a foreclosure. Below, we will review some of those mortgage options.
You will find lenders offering a myriad of bad credit mortgage options if you have poor credit. These bad credit mortgages are considered subprime mortgages because they do not meet conventional mortgage credit guidelines.
The bad credit or subprime mortgage options will look like other mortgages that you are familiar with. They will be available in both 30 year and 15 year terms as well as a few adjustable rate options. These mortgages have some or all of the features below:
One of the concerns borrowers have when shopping for bad credit mortgages are the rates. Lenders are taking on additional risk when originating mortgages to individuals with poor credit. This is especially true when there is a recent bankruptcy or foreclosure. As a result, you can expect the interest rate to be higher than what you would likely get with a conventional loan and good credit.
Mortgage rates will typically be roughly +/-2% higher than conventional rates. However, every lender weighs their risk differently which is why rates, terms and down payment requirements will vary.
Most people do not realize that FHA guidelines permit credit scores as low as 500. However, you will need to speak with bad credit FHA lenders who are willing to accept credit scores that low. Many FHA lenders have their own credit minimums that they are willing to accept which may be tighter than the FHA guidelines.
If your credit score is below 580, you can still find an FHA loan but you will need a minimum of 10% down. FHA guidelines also do not permit recent bankruptcies or foreclosures. This option would only help if you have a low credit score.
Hard money lenders are essentially a last resort option for people with bad credit. They offer mortgages to individuals who have low credit, no job, or for those who need the money quickly and do not want to provide any documentation.
Hard money loans are also very popular for people who are doing a fix and flip with a property. They will need at least 30% down and they do not care about the interest rate because they do not plan to hold onto the mortgage for a long time.
Interest rates for hard money loans are very high. You can expect 10% or more plus a few points up front. This is not a cheap loan option.
When applying for a mortgage with bad credit, it is important to come to the table with some compensating factors. These factors will help you to qualify despite your poor credit. They also may help a bit with the mortgage rate. Some compensating factors include:
Your mortgage options will be virtually the same regardless as to whether you are buying or refinancing. However, you may find that for refinances and especially cash out refinances, your maximum loan to value may be capped below that of a purchase.
Most lenders actually do not offer mortgages for individuals with poor credit. This is especially true for the big banks such as Bank of America and Wells Fargo. They are only interested in the customers with the best credit and loan scenarios. If the loan does not fit into the conventional Fannie Mae guidelines, then you will likely not find a mortgage option with them.
Your best bet is to search for national niche lenders online. This is where you will find most of the bad credit mortgage solutions.
The good news is you can find a mortgage despite having bad credit if you shop around and find the right mortgage lenders. Remember, they all will not be the same. Most important is your ability to improve your credit. There are many ways to quickly improve your credit score which can help make your mortgage Fannie Mae eligible.