So you want to get a home loan but you have bad credit..
You probably have many questions, such as..
Can i get a home loan with low credit scores? Where do I find Lenders that work with poor credit? Is it possible to raise my credit score so I can get approved?
Poor Credit Mortgage Programs
There is a mortgage program that helps people with less than perfect credit get approved for a home loan. It’s called an FHA loan. FHA loans are a type of government mortgage program that encourages homeownership in the U.S. These loans are quite popular because of their reduced credit requirements and low down payments.
Benefits of FHA Loans
There are many benefits to FHA loans. Besides just needed a 580 credit score, they require just a 3.5% down payment. Because you can roll your closing costs into the loan, FHA mortgages require very little cash upfront. Especially compared to conventional loans requiring up to 20% as a down payment.
FHA loans also have lower interest rates than conventional mortgages do. These government mortgage programs have become the most used type of home loan used today.
- 3.5% down payment
- Down payment can be a gift
- 580+ credit score requirements
- Low interest rates
- Higer DTI ratios allowed
Who Qualifies for FHA Loans
An FHA mortgage requires a 500 credit score if you have at least a 10% down payment. However, it is quite difficult to get approved with a score under 580. I would recommend getting your credit score above 580 before applying for a mortgage.
You will have a much less difficult time getting approved for an fha loan with a credit score of at least 580. You will also only need a 3.5% down payment to qualify. A loan to cause ratio below 41% is recommended. The lower your DTI ratio the higher yours odds are of getting approved. Here you can figure out your DTI ratio and calculate how much house you can afford.
How to Raise your Credit Score to Qualify for a Home Loan
If you have credit issues and your score is lower than 620, you need to do everything you can to maximize your credit score before applying. Here are some tips you can use to improve your credit score in a hurry.
Dispute collection accounts with the credit bureaus
Collection accounts ruin your credit score because your payment history is 35% of your FICO score. But don’t run out and pay off your collections thinking it will improve your credit score, because it won’t. Only if the collection account is removed from your credit profile entirely will it no longer negatively affect your credit score.
Instead of paying it, which will not improve your score. You should file a dispute with the credit bureaus. If the creditor does not validate the account within 39 days the credit bureau will remove the collection account.
Pay down balances on your credit cards
If you have open credit cards with high balances it is significantly dropping your credit score. you need to pay the balance as low as possible. Your credit utilization ratio accounts for 30% of your credit score. By paying off the balances you will see your credit score skyrocket. If possible, pay the balances to zero, at the very least keep the balance below 15% of the limit.
Try to settle and remove collections
Ask the collection agency for a “pay for delete” this is an arrangement where the creditor agrees to remove the collection account once you pay the amount owed. If they agree to this, you will get a letter stating the creditor agrees to remove the account. You make the payment, and you’re done. However, if the collection agency does not agree to a pay for delete, do not pay it. Dispute it with the credit bureau first.
Contact creditors to remove late payments
Almost all of us have been late on a payment at some point in time. Late payments really impact your credit score. Having a late payment deleted by disputing it with the credit bureau is very rare. Instead, you should contact the creditor and ask if they can remove it. Or, if you have a legitimate reason for the late payment explain it to them to see if they will be able to remove the late pay. This doesn’t always work but I’ve seen many cases where it does. Like in our article about how to get late payments removed from your credit report.
Have someone add you as an authorized user
An authorized user is a second user on a credit card account that is allowed to make purchases. If you have a friend or family member with a credit card in good standing they can add you to their account. When they do this, all of the account information will appear on your credit report.
FICO does include authorized user accounts as a factor in your credit score, so your score should increase. You do not even need to physically have a card, which greatly reduces the risk to the account owner.
Other factors than may help you qualify for a mortgage with bad credit
Lenders look at more than just your credit score to determine if a borrower qualifies or not. Your income, length of time at your employer, DTI ratio, loan-to-value ratio, even paying your rent on time can help your chances. If you have high income, or a large down payment these are called compensating factors. Compensating factors that help reduce the lenders risk making up for the fact that you have a low credit score.
Common compensating factors
- Low DTI ratio (high income)
- Large Down payment (more than 10% down)
- Several years with the same company
- Successful rent payments equal to or higher than estimated mortgage payment
- Substantial documented cash reserves
- Potential salary increase
Where to find bad credit mortgage lenders
While the FHA requires a 580 credit score, lenders do not have to follow these guidelines, and most do not. Lenders set their own minimum credit score guidelines they are willing to accept. One lender may deny a borrower with a 580 credit score, while another lender is able to approve that same borrower. Just because one lender denies you don’t get discouraged and give up. Keep on applying.
If multiple lenders are unable to approve your loan just follow the advice in this article to bring your credit score up. After a few months you just may be ready to finally get approved for a mortgage.