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

BY The Lenders Network

first-time homebuyer with bad credit

8 minute read

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.

Luckily the Federal Housing Administration started offering FHA loans which have low credit and down payment options.

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Mortgage Options for First-time Homebuyers

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

Due to the recent economic downturns and unstable job market, many people have had their primary sources of income compromised. As a result, it has had an impact on their credit scores.

In this article we discuss those loan options and give advice that will help you as a first time home buyer with bad credit.

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Compensating Factors for Poor Credit

Mortgage lenders don’t just use your credit history to determine if someone qualifies or not. There are certain compensating factors that can help make up for a 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 in 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, in 2017 we’re seeing subprime loans make a comeback and are more readily available than they once were.

FHA loans are perfect for first-time home buyers, they require a 580 credit score and a low down payment of 3.5%. FHA loans make is 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 around 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 mainly because if you’re a first-time buyer with bad credit you still may qualify for an FHA home loan.

FHA loan credit requirements

FHA Mortgage requirements

  • 580 or higher FICO score
  • 3.5% downpayment (downpayment can be a gift from a relative)
  • Stable employment with at least 2 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 own 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 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 a 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

It is recommended that you get quote from as many as 3 different lenders. Your interest rate and loan fees will vary from lender to lender, get a couple 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 a 30 day period will count as a single inquiry.

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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 qualify for certain housing assistance programs.

These programs help with the down-payment and/or 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 certain 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.

Ways to Improve Credit Rating Before Applying

  • Pay down credit card balances to under 10%
  • Remove late payments and collections
  • Get added as an authorized user
  • Don’t apply for credit

Veteran Programs

There are VA Home Loan Programs available that provide no down payment loans. This means veterans can borrow 100% of the purchase price and often without points or private mortgage insurance.

There are some fees involved, such as title fees. But veterans will usually experience very favorable rates and terms when applying for 100% financing home loans.

Interest rates or funding fees on these loans are as low as 2.15% for veterans or current members of the military. They are 2.4% for individuals who are in the Reserves or the National Guard.
In most cases, there is no private lender origination fee of the loans that are guaranteed by the VA.

Navy Federal Credit Union

Financial institutions like the Navy Federal Credit Union is the country’s largest credit union in terms of assets and memberships. They also provide 100% financing to its members who desire to purchase a home as their primary place of residence.

The Navy Federal Credit Union has restricted this program to certain individuals. However, they have extended the program to other individuals. These include civilian employees of the U.S. Military, the US department of Defense as well as members of their family.

Those who are members of the Navy Federal Credit Union will experience the lower funding fees of 1.75%. This is less than that of the funding fees offered the by Veterans Administration.

No Down Payment Options

Most first-time homebuyer programs that require no down payment requires higher minimum FICO scores.

What that means is that a good credit score suggests more credit worthiness. This would substantiate the lender taking a risks in providing you with a loan with no money down.

The USDA home loan program also makes loans available throughout the United States with no money down. However, a 640 credit rating is required for a USDA home loan.

First-time homebuyer tax credit

The first-time homebuyer credit was offered to homebuyers who purchased their first home in 2008. The credit has expired. However, there is another form of tax break homeowners get to enjoy which is that the interest can be written off. For more information please contact a tax professional.

How to get Started

You may be wondering what’s the best way to get started on the path of home ownership. If you’re a first time home buyer with bad credit Or how to take advantage of the best first time buyer programs that are available.

Well, first of all, there are many different approaches that can be taken based on the goals that you have. For example, you may be just points from having the credit score that would qualify you for a loan. So your goal might be to slightly improve your credit score. But before you can do that, you need to know exactly where you stand.

Check Your Credit Report and Get Your Free Scores

There are several companies that allow you to check your credit report and score once a month for free. Credit Karma, Credit Sesame, and WalletHub are 100% free, no credit card required. They even have their open apps that make it easy to use and convenient .

Once you’ve determined what your credit score is, then you’ll know how far you are from reaching your targeted goal. You can do this by checking with the top three credit reporting bureaus (TransUnion, Equifax and Experian).

Although there is a minimum credit score for first time home buyers, you should still attempt to improve your score. You’ll want to raise the bar by constantly making improvements to your overall credit score and eventually transform your worthiness.

Check out our Do-it-yourself credit repair guide if you want to increase your credit score and don’t want to pay money to a credit repair company for something you can do yourself.

Such improvements could involve making payments more consistently and in more of a timely manner. You may also determine that there is some questionable activity on your credit report that needs to be removed.

There are first time home buyer programs available, for people with poor credit scores. However, it’s not designed for people to become complacent in that area and not make on-going improvements to their scores.

Planning Ahead

If you are planning to become a homeowner, it’s always good to get your financial house in order. You should get in good standing with as many of your creditors as possible. Mainly because you may determine that later down the line, you may want to purchase a larger home.

Additionally, you may want to move to a different neighborhood or eventually refinance your home. Whatever the case, improving your credit should be a part of your overall goal, which may be advantageous for you.

If you’re planning to put a down payment on a home, then you should know how much house you can afford. Basically, you’ll need to know what size home you need, the area and the likely price range. For example, if you’re purchasing a $250,000 home and need a 10% down payment, you’ll need to save $25,000.

But if that’s a stretch for you and you can only save 3.5%, then you’ll need to save $8,750. With this amount, you qualify for some of the programs with a lower down payment requirement. This is why it’s important to know where you stand before pursuing a home loan.

You may have to do a little research and spend some time preparing yourself to qualify for home loan. You still need to show that you have steady income and that you’ve been employed for at least 24 months. This is true even if you qualify for a home loan based on your credit score or down payment.

Home ownership is a big responsibility, but being prepared will make the process a lot easier for all parties involved. Even if you have the bear minimum credit score first time home buyer, thorough research and preparation can stremline the process.

What Are Today’s Mortgage Rates?

First-time home buyers statically have lower credit scores than the average American. That okay, because there are several programs available to first time home buyers with bad credit scores.

FHA loans are a great option for people with poor credit.

Requiring just a 500 credit score with 10% down and a 580 score with 3.5% down. They have very favorable terms.

Get a mortgage rate quote with our partner lenders