7 Things First-Time Homebuyers with Bad Credit Need to Know

first-time homebuyers with bad credit

If you’re a first-time homebuyer with bad credit, you may be wondering what options you have.

The fact is, you’re not alone.

First time home buyers have lower credit scores than the average borrower.

However, the days of needing a good credit score and a 20% down payment are a thing of the past.

Many first time home buyers just don’t have that much in saving to put towards a down payment.

Get Pre-Approved for a Mortgage

Compensating Factors for Poor Credit

Mortgage lenders don’t just use your credit history to determine if someone qualifies or not. Certain compensating factors can help make up for poor credit history.

  • High down payment
  • Large savings accounts
  • High income (low loan-to-value ratio)
  • No payment shock (currently paying comparable amount in rent)
  • Long employment history
  • Possibility for advancement with their current company

1. Find a lender that works with bad credit

Younger first-time homebuyers with bad credit usually have a hard time finding a lender to work it.

Nowadays, many lenders have increased their minimum credit score requirements because of the 2008 housing crash. However, we see subprime loans making a comeback and are more readily available than they once were.

FHA loans are perfect for first-time homebuyers. They require a 580 credit score and a low down payment of 3.5%. FHA loans make it much easier for a first time home buyer with bad credit to purchase a house.

However, not all lenders will approve borrowers with a 580 credit score. Many will require a higher score of 620. There are several lenders that can help you even with poor credit.

2. VA Loans for Veterans with bad credit

VA home loans offer many benefits to Veteran first-time home buyers. If you’re a Vet and are interested in a mortgage, you should get more information on how VA loans work and their benefits.

These loans include 100% financing and no monthly mortgage insurance premiums. VA loans have low credit score requirements.

3. FHA loans – The perfect home loan for first-time homebuyers

FHA loans are incredibly popular amongst first-time buyers. This is because if you’re a first-time buyer with bad credit, you still may qualify for an FHA home loan.

FHA Mortgage Requirements

  • 580 or higher FICO score
  • 3.5% downpayment (downpayment can be a gift from a relative)
  • Stable employment with at least two years at the same company, or in the same line of work
  • Verifiable income. W2’s, Tax Returns, Paycheck stubs, and bank accounts will be required
  • No late payments in the past 12 months (exceptions may be considered)
  • Debt-to-Income ratio – 31% Max front-end DTI – 43% Back-end DTI

4. FHA loans with bad credit or no credit at all

If you’ve never had credit in your name, your credit may not exist. However, some lenders may be able to help you get an FHA loan with no credit.

A lender can use alternative credit lines, like utility bills, phone bills, and rent payments, to establish a positive payment history.

You must have a positive payment history for the past 12 months, with NO late payments. Here is what the FHA handbook HUD 4155.1, says about borrowers with no credit.

“The lack of credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application…Some prospective borrowers may not have an established credit history.”

Remember that even though the FHA rules do not disqualify a borrower with no credit history, some lenders might. Of course, if you have a poor credit rating, you will have a higher interest rate.

5. Shop around for the best mortgage rate

I recommend that you get a quote from as many as three different lenders. Your interest rate and loan fees will vary from lender to lender, get a couple of quotes to make sure you get the best deal.

Many people fear shopping for the best mortgage rate because they are concerned that it may lower their credit scores. However, FICO allows a 30-day “Rate shopping” window, where multiple inquiries from mortgage companies within 30 days will count as a single inquiry.

Get a mortgage rate quote with our partner lenders

6. See if you qualify for down-payment assistance or grants

If you’re a first-time buyer with low-to-moderate income, you may be eligible for down payment assistance or grants.

These programs help with the down-payment and closing costs making it easier to become a homeowner. You can for state programs through the HUD website.

Your local city and county will also have assistance programs that are available listed on their website. If you do qualify for one of these programs, it will make the process of buying a home with poor credit less difficult. You will be required to meet specific guidelines and will have to take a homebuyer education class.

7. Improve your credit score before closing

There are ways for most people to improve their credit score quickly. This may be by paying your credit card balances down or disputing inaccurate negative information on your credit report. Also, remember to make all of your payments on time, a 30-day late payment can drop your score significantly.

Making sure your credit score is maximized before submitting your house contract will make the home buying process easier and help you get the best interest rate possible.