Updated May 17th, 2017
If you have low credit scores then you probably know it’s difficult to get approved for a mortgage.
However, there are people who get approved for home loans with bad credit everyday.
In this article you will learn about mortgage programs for people with poor credit as well as some tips to improve your credit score.
The Best Mortgage Programs for People with Poor Credit
Most traditional mortgages require at least a 620-640 credit score to qualify. Making it impossible for many Americans with lower credit scores to qualify. The Government created the Federal Housing Administration, making FHA loans available. An FHA loan is a Government mortgage program making is possible for more American’s to qualify for a home loan even with low credit scores.
FHA Loans – The Bad Credit Home Loan Program
The FHA general requirements for credit scores is lower than any other type of home loan program. They do not lend money, they insure the loan, if a borrower defaults on a mortgage the FHA will pay the amount owed to the lender. This greatly reduces the risk for lenders and they loosen up their requirements for borrowers.
Another great benefit of FHA loans is that the down payment can be a gift from a friend or family member. If you are being gifted the down payment you can receive 100% financing for your mortgage.
You Don’t Need A 620 Credit Score to Qualify
The FHA will insure loans for borrowers with a 500 – 579 credit score with a 10% down payment. And will insure a loan if a borrower has at least a 580 credit score with just a 3.5% down payment. However, it should be noted that lenders do not have to follow the FHA minimum credit score requirements, and often they do not.
If you have a score below 580 you really need to work on improving your credit before applying for a mortgage. If you have a credit score of 580 – 619 you need to make sure you are maximizing your credit score before applying. Later on in this article we will show you the 5 things you can do to increase your score in a hurry.
Finding Poor Credit Mortgage Lenders
Each lender sets their own credit score requirements. While some need a 620 credit score for FHA loans, other lenders are able to work with a 580 score. There are several lenders that can work with low scores you can find by doing a quick Google search. However, you should be careful about giving up your personal information to just anyone.
Make sure you are applying with a reputable lender. The lenders Network has several lenders in our network that do work with people with less than perfect credit. Complete the form on our website to speak to our lenders about bad credit home loans.
Getting Pre-Approved for a Mortgage
You need a pre-approval letter to make an offer on a home. In fact, most Realtors will not even show you any properties unless you are pre-approved. A pre-approval letter means that a lender has checked your credit report, verified your income, reviewed tax returns and bank statements, and you qualify for a mortgage based on the information provided. It is not a guaranteed approval, just a high likelihood of mortgage approval.
First Time Home Buyers with Low Credit Scores
The average credit score for homebuyers is 686 according to Ellie Mae, a software program that processes mortgages. First time buyers on average have lower credit scores than the average home buyer. Because of these low credit score requirements and low money down, FHA loans have become very popular among first-time home buyers. You may be able to get with no down payment if you qualify for any home buyer grants.
There are various first time buyer grants and down payment assistance programs on the HUD website. Visit your local county website to see if they offer down payment assistance or grants for first time home buyers.
Mortgage Refinance Programs with Low Credit Scores
There are also programs to help people with bad credit scores refinance their home. These two refinance programs were created by the Government to help reduce the amount of foreclosures by allowing people who are upside down on their mortgage, or have low credit scores refinance into a lower payment and rate.
If you would like to lower your mortgage payment but struggle with low credit scores you should look into a HARP loan or streamline refinance.
Streamline refinance programs do not require a credit check or income verification. FHA and VA streamline refinances are a great way for borrowers with a Government loan, such as FHA or VA to refinance into a lower rate without having perfect credit.
How to Increase your Credit Score to Qualify?
Credit scores measure the probability a borrower will repay the loan without going 90 days late. The higher your credit score is, the lower your risk of default. Having good credit means getting approved more often and receiving lower interest rate on loans and credit cards. Before applying for a home loan you should work on getting your credit score as high as it can be first.
Tips to raising your credit score for a mortgage
- Pay down the balances on your credit cards
- Do not miss any payments
- Do not have too many credit inquiries
- Dispute negative information
- Contact creditors to delete collection accounts if you pay them
- Get added as an authorized user
Read our article for more information on raising your credit scores in a hurry
Get a Mortgage Now, or Wait Increase my Scores?
If you are debating whether or not you should apply for a home loan now, or wait until you have a higher credit score, there are a few things to consider. Home prices are on the rise, so the longer you wait the more you’re going to pay. Interest rates are still at historical lows, if you are able to get a mortgage, you probably should. The rate you get with poor credit will be higher, however that rate may still be lower than the rate someone will receive with good credit when rates increase.
If you need to work on your credit before you can qualify for a mortgage. Most people can improve their score by 15-75 points quickly by following the advice in this article. Either way, getting approved for a mortgage with low credit scores is possible, if not today, then in the near future.