Getting approved for a home loan with bad credit is no easy task.
Especially since the 2008 housing market crash, sub-prime loans almost disappeared.
There’s great news though!
You still have mortgage options with bad credit.
FHA loans allow borrowers to have just a 500 credit score or higher to qualify.
In this article you will learn about bad credit home loan programs and how to get approved despite having imperfect credit.
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FHA Home Loans
Traditionally in order to get approved for a mortgage loan you needed to have at least a 620-640 credit score. This makes it impossible for many buyers with lower credit scores to qualify for a mortgage.
Enter.. The FHA Mortgage. FHA loans were created by the Federal Housing Administration in 1934 to increase home ownership in America. By insuring mortgage loans the risks lenders face was greatly reduced.
It is much easier to qualify for this Government home loan than a conventional mortgage because of the lenient loan requirements.
You can choose between a 15 year or 30 year fixed-rate mortgage, or adjustable rate mortgage loan. The term “bad credit home loans” often refers to an FHA mortgage, or sub-prime loan.
FHA Credit Requirements
Because FHA home loans are insured they are much less risky for lenders. They are able to lower their minimum requirements for a loan.
No longer do you need to have a 620 credit score, people with poor credit can get approved. These “bad credit home loans” are known as a sub-prime mortgage.
FHA loans allow for poor credit scores as low as 500 with 10% down and 580 score with 3.5% down.
Get Your Free Credit Score
First you should review your credit history and find out how bad your score really is. If it’s too low then you should work on improving it before applying for a home loan.
You can get your free credit score and report from these trustworthy websites.
Compensating Factors for Bad Credit
If you have a poor credit rating then you will need to show some compensating factors that help make up for it.
You will also need to show a financial hardship was the reason you fell behind on your monthly bills and you have since recovered and have re-established credit. Usually if you have poor credit your loan will go through manual underwriting.
These compensating factors reduce the risk to the lender and increase your odds of getting approved with a poor credit history.
- Large downpayment (10% down or more)
- Low debt-to-income ratio
- High income
- No outstanding debt
- Large amount of cash reserves
- Significant amount of time with current employer
- Paying comparable rent payments – No payment shock
First-Time Homebuyers with Poor Credit
FHA loans have become a very popular mortgage for first-time homebuyers because of their low credit and down payment requirements. This also makes them easier to qualify for than a conventional loan.
FHA loans also allow gift funds for the down payment. 100% of the down payment can be a gift from a friend or family member. First-time buyers may be able to buy a home with no down payment if you qualify for any homebuyer programs.
There are various first-time homebuyer 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.
Down-Payment Assistance and Grants
You may be able to qualify for down-payment assistance or Federal Grants. Search the HUD website to find local state programs. You city or county should also have any available programs listed on their website.
VA Home Loans
If you’re a Veteran you may be eligible for a VA home loan. VA loans have many benefits, including no money down and no mortgage insurance.
The VA does not have a minimum credit score requirement. However, most lenders will require a 620 or higher FICO score. Some VA lenders may be able to work with a 580 credit score in some situations.
USDA Rural Development Loans
The U.S. Department of Agriculture created the USDA home loan program to encourage home ownership in rural areas of the country. These rural loans are specifically for low-to-moderate income families.
When you think of the word “rural” you think of farms and open road. However, more than 90% of the country is in a USDA eligible location. Check the USDA map here.
USDA home loans, like VA mortgages are a 100% financing home loan. Because there is no down payment, the credit score requirements for USDA mortgages is a little higher than FHA.
Most lenders will require a 640 credit score to qualify for a USDA home loan. These Section 205 Direct Rural Loans are slightly more risky because they require no money down.
Home Improvement Loans
FHA 203(k) Rehab Loan
For the buyer that is interested in getting a home that is need of repairs, or needs renovations there is the FHA 203(k) home loan.
A 203k loan gives you the funds to buy the home plus gives you additional cash to make repairs. There are two types of FHA 203k loans, streamline and standard.
A streamline 203k loan is a quick and easier loan process for basic cosmetic repairs. If the property needs major repairs such as plumbing or foundation then a standard 203k loan will be needed.
The FHA 203k loan has the same requirements as an FHA loan, except they require a good credit score. Typically you will need a 640 FICO score to qualify for a 203k loan.
Fannie Mae HomeStyle Renovation Mortgage
A HomeStyle renovation mortgage works similarly to a 203k loan. You are given the funds to purchase a home plus additional money to make repair or renovations. The benefit of this loan is that the loan for the home and rehab are combined into one money payment.
You will not have a second mortgaged the terms are usually much more favorable than if you had to get a home equity loan.
Check out our mortgage calculator to see how much house you can afford
Mortgage Refinance Options with Bad Credit
There are also programs to help people with bad credit refinance their existing mortgage.
These 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.
HARP – In 2010 the Obama Administration created the Home Affordable Refinance Program to help Americans who were underwater on their mortgage be able to refinance into a lower rate and payment. The HARP program is available for mortgages owned by Freddie Mac or Fannie Mae.
FHA Streamline Refinance – If you have an FHA loan you may qualify to refinance your home using this program. Streamline refinances do not require a credit check or income verification. FHA and VA streamline refinances are a great way for borrowers with a Government loan to refinance into a lower rate without perfect credit.
Home Equity Loan and HELOC – A home-equity loan is where you use the equity in your home as collateral for a loan. It is also known as a second mortgage. With a HELOC you can tap into your equity with a line of credit that works similarly to a credit card.
If you have bad credit then a home equity loan will be very difficult to qualify for. A cash-out refinance is easier to qualify for people with poor credit scores.
Where to find the best bad credit lenders?
Each lender sets their own credit score requirements. Finding a subprime mortgage lender who can work with a 580 credit score is not always as easy as you may think.
If you google 580 credit score lenders many results will pop up.
You should be careful about giving up your personal information to just anyone. Make sure you are applying with reputable lenders.
There are many online lenders out there that offer home loans to people with bad credit. You need to make sure you find the best mortgage company for your situation.
Search Bad Credit Home Loans – Get Approved Now
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.
Mortgage Calculator: See how much you house you qualify for
Getting a Mortgage After A Bankruptcy, Short Sale, or Foreclosure
If you have gone through a bankruptcy, short sale, or been foreclosed on there is a 3 year waiting period you have to go though before you’re able to qualify for a Government home loan.
There is a program called the FHA back to work program that shortens the waiting period to just 12 months to those who qualify.
To be eligible for the program you’ll have to show you had an unforeseen financial hardship that caused the event that you must re-establish credit.
You cannot have any late payments or collection accounts since the bankruptcy or foreclosure was dismissed.
Your credit score represents the likelihood you will be 90 days late on a loan. FICO, the credit scoring company used by mortgage lenders, grades your credit score ranging from 300-850.
720 and higher = very good
680 to 719 = good
640 to 679 = fair
580 to 639 = poor
579 or lower = bad
How to Increase your Score to Improve Your Chances of Getting Approved
Before trying to get a home loan with bad credit you should work on getting your score as high as it can be. The higher your score the better odds you have of getting approved for a mortgage. If you have a significant amount of negative accounts you should use our free DIY credit repair guide.
If you have a lot of debt then a debt consolidation program may be a good option to help you pay off your debt quicker and at a lower interest rate.
Tips to raising your score for a home loan
- Pay down the balances on your credit cards
- Do not miss any credit card or loan 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
- Get a secured credit card
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 FICO 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 and the higher your monthly payment will be.
Interest rates are still at historical lows, if you are able to get a mortgage, you probably should.
The rate you get with bad credit will have a higher interest rate, however that rate may still be lower than the rate you would receive when rates increase.
Not all mortgage companies will have the same credit score requirements. If one lender denies your loan, don’t lose hope. Keep on applying with different lenders until you find one that you approve your loan.
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