First-time homebuyers’ main hurdle in becoming a homeowner is the down payment and credit score requirements.
However, the days of needing perfect credit and a 20% down payment are a thing of the past.
In this article, we will go over some of the mortgage options available to first-time buyers with bad credit.
Current Mortgage Rates (Novermber 2020) | ||
Loan Term | Interest rate | APR |
30-year fixed-rate mortgage | 3.15% | 3.38% |
15-year fixed-rate mortgage | 2.91% | 3.06% |
5/1 adjustable-rate mortgage | 3.05% | 3.25% |
Bad Credit Home Loans
No and Low Down Payment Mortgage Options | ||||
Min Credit Score | Down Payment | Max DTI Ratio | Income Limit | |
FHA Loan | 580 | 3.5% | 43%-50% | No income limits |
VA Loan | 580-620 | No down payment | 50% | No income limits |
USDA Loan | 640 | No down payment | 50% | 115% of area median income |
HomeReady /Home Possible Loans | 620 | 3% | 50% | 80% of area median income |
FHA loans
FHA loans are the most popular type of home loan for first-time homebuyers. They require a 580 credit score with a down payment of 3.5%, borrowers with a 500-579 credit score may qualify with 10% down. Making it much easier for first-time buyers with credit issues to purchase a home.
HomeReady / Home Possible Loans
Conventional mortgage loans are not backed by the government, they are backed by private mortgage insurance companies.
The HomeReady and Home Possible Loan programs were created for low-income first-time homebuyers with a 620 or higher credit score. Just a 3% down payment is required. There are income limits, in order to qualify your income cannot exceed 100% of the area median income.
VA Loans
VA loans have many benefits for Veteran first-time home buyers, including 100% financing and no mortgage insurance. Most lenders require borrowers to have a minimum 580-640 credit score to qualify for a VA loan.
USDA Loans
The U.S. Department of Agriculture guarantees USDA loans for low-to-median income borrowers in rural areas. To qualify borrowers’ income cannot exceed 115% of the area median income (AMI).
You need a 640 credit score to be approved for a USDA loan. The property must also be located in a USDA-eligible location.
First-Time Homebuyers with No Credit
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.
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
Down-Payment Assistance Programs and Grants
If you’re a first-time buyer with low-to-moderate income, you may be eligible for first-time homebuyer 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.
Improve your Credit Before Applying
There are ways for most people to improve their credit scores quickly. This may be by paying your credit card balances down or disputing inaccurate negative information on your credit report.
Ensuring 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.
- Pay down credit card balances to under 20% of the credit limit
- Set up autopay to make your payments on time automatically
- Do not apply for new credit
The Bottom Line
If you’re a first-time homebuyer with bad credit it more difficult to get approved for a home loan, but not impossible.
There are mortgage programs such as FHA home loans that are available to borrowers with a credit score as low as 500 with 10% down or 580 with 3.5% down.
If possible, spend some time working on improving your credit score before you apply.
Are you ready to get pre-approved for a mortgage?
