Your credit score will tell a lender how likely you are to pay back the amount you have borrowed. Anything between 580-669 is considered a fair score while 300-579 is a poor score. Below 570 may be looked down like a bad or subprime credit score. Thus, a home loan with a bad credit score might seem an uphill task These credit scores are calculated on the basis of factors such as:
- The total amount you owe
- Your payment history
- Types of credit issued
- New credit
- Length of your credit history
Credit scores are not static. They change with changes in the credit report. This means that in order to buy a house with bad credit you can take steps to make yourself more eligible.
Other factors to keep in mind
Outside of your credit score, lenders may also be interested in keeping a check on other factors like:
- How much you have available for a down payment in the form of cash? The more you have for the down payment, the better it is for you to get a mortgage for bad credit.
- Whether your overall amount of debt is low enough and your income? Your debt-to-income ratio compares your monthly debt payment to your monthly gross income. A low DTI ratio says that you have sufficient income relative to debt servicing. Most lenders look for a DTI of less than 50% as desirable to give you a home loan for bad credit.
- Your income and assets are essential in determining your eligibility for getting a home loan for bad credit. The higher your income the lower will be your DTI. Assets in the form of resources and savings are important to have in order to be able to pay down payment and in case your lender asks for reserves.
- Your current income as well as your history of receiving income is important. The mortgage lender will want to see that you continue to get paid. You will also want to try to avoid changing jobs in the middle of the mortgage for a bad credit process unless you shift to a high-paid job in the same field.
- Having a co-signer will help you to qualify for a loan. When someone cosigns a loan with you, their assets and income are also used to determine your eligibility. The extra income will lower your DTI Ratio. The assets of your co-signer can be used to show that you possess funds for downpayment or reserve requirements.
So, how to buy a home with bad credit?
You can apply for an FHA loan – Loans that are insured by the Federal Housing Administration (FHA loans) are set with lower credit requirements. You will be considered eligible for an FHA-insured mortgage with a down payment requirement of as low as 3.5 percent of your home’s purchase price even with a low credit score. However, the caveats here are:
● Although FHA loans are being insured by the administration, they are instigated by traditional mortgage lenders.
● Lenders can devise FHA-insured loans for pledgers with credit as little as 500 but that is optional. They can still ask for higher credit scores.
Come up with a larger down payment – Lenders will have a higher chance of giving you a loan if you offer a higher down payment.
These days it is possible to get a loan with a downpayment of 3% but with a low credit score if you can manage to offer a larger sum, say a downpayment of 20%, you may get the loan more readily.
The reason here is similar to why lenders charge higher interest to borrowers having poor credit. Two things happen when you put down more money upfront to buy a house with bad credit.
- The lender is convinced that you are willing to take a greater risk in a home loan with bad credit.
- The lender believes you are less likely to walk away from a mortgage when you invest more of your own money into the purchase from the beginning.
Rebuild your credit –
In order to avoid these penalties such as a higher interest rate or higher fees, and actively work towards improving your credit and standing with lenders to increase the chances of getting a new loan sooner rather than later, you can try the following:
- Try to not pay your outstanding debts late and continue paying all your bills on time.
- Obtaining a credit card and using it on a regular basis. Keep your credit card balances between 10 – 30% of your credit limit.
- Give proof of steady employment on a job for at least 1 to 2 years.
Apply for a VA Loan if you are a veteran or an active-duty member of the armed forces
The VA Loans are backed by the Department of Veteran Affairs and allow any borrower with the status of a veteran or member of the armed forces to buy a home with bad credit with very low to zero down-payments.
Apply for a USDA Loan
A USDA home loan provides mortgages with zero down payment to eligible homebuyers in rural and suburban areas USDA loans are delivered via the USDA loan program (USDA Rural Development Guaranteed Housing Loan Program) by the United States Department of Agriculture.
Find a co-signer
If you want to get a home loan with bad credit, consider asking a friend or family member with better credit to cosign with you on your mortgage. The co-signer’s credit will serve as a positive aspect of your application. However, this will make your co-signer responsible for the repayment of not just a part but the entire amount borrowed in case you fail to pay or default. Also, if you are late or miss a payment, it will harm your co-signer’s credit rating.
Look for first-time buyer programs
You may look at first-time homebuyer programs to buy a house with bad credit even if you have owned some property before. In many cases, you become eligible to be a first-time buyer if you have not bought any property in the last three years,
Look at a variety of lenders
Traditional banks are not the only mortgage options available. There are plenty of other sources such as online and community banks, non-bank lenders, credit unions. Do not forget to check all your options before making a final decision.
Thus nowadays there are several options available to get bad credit home loans that you can choose for. Everyone’s situation is different and your specific situation will determine which option you should resort to. While it is possible to get mortgage loans with bad credit, you will be required to pay higher interest or much higher mortgage payments in most cases. Buying a home is a huge decision and you should consider all your options. Make sure of your abilities to pay back the amount you have borrowed but choosing to take a home loan. This is the reason it may be best to navigate your options. Hence, take the necessary steps to improve your credit score while doing so.