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Homeowner with Bad credit

How to Become a Homeowner with Bad Credit

Most people understand that lenders consider your credit scores in the home loan approval process. If you don’t have good credit, getting a mortgage loan is more challenging. Here, we discuss how to improve your chances of getting a mortgage loan with less than stellar credit.

Before we discuss how to get a mortgage with bad credit, let’s consider credit score ranges. Credit scores start from a low level of 300 to “perfect” credit at 850. According to myFICO, the most popular credit scoring model, the following credit score ranges are used to classify the borrower’s creditworthiness:

 

  • 800+ is “exceptional”
  • 740-799 is “very good”
  • 670-739 is “good”
  • 580-669 is “fair”
  • 300-580 is “poor”

 

Can I Buy a Home with Bad Credit?

 

Typically, conventional mortgage lenders look for credit scores of 620 or more. A conventional mortgage loan is a type of mortgage that isn’t backed by a U.S. government agency. If your credit scores are less than 620 (in the fair credit range), you may have fewer loan program options than borrowers with better credit.

 

You may wonder why it’s more difficult to get a mortgage loan with slightly lower scores of 580 to 619. These scores are still considered “fair credit.” The answer is that getting approved for a mortgage loan is a significant undertaking. The lender is loaning you a considerable amount of money and wants to know that you will repay your mortgage on time and as agreed. Because of this, your mortgage lender is likely to be more careful about approving your credit for a mortgage loan.

 

What Kinds of Home Loans Are Available if I Have Bad Credit?

 

Some lenders will approve borrowers with fair credit scores less than 620, including:

 

  • Federal Housing Administration (FHA). As an agency of the United States government, FHA helps people with credit scores of 580 and above to get a home mortgage. You may qualify for a mortgage loan with a 580 credit score and put down just 3.5 percent. It’s still possible to qualify if you have lower credit scores (500-579) with 10 percent down or more. Search for lenders who make FHA loans.

 

  • The U.S. Department of Agriculture (USDA). Backed by the U.S. Department of Agriculture, USDA loans help low-income borrowers to purchase homes in rural communities. It’s possible to get approved for a USDA loan with average credit scores of 640 or higher. It may be possible to get approved for a USDA loan with lower scores in some instances. Some borrowers may be eligible for zero percent down payment loans.

 

  • The Department of Veterans Affairs (VA). VA loans are guaranteed by the U.S. Department of Veterans Affairs for both veterans and active military members. In most instances, VA loans require credit scores of 620+. Some VA lending institutions approve borrowers with lower credit scores (580 or higher). It’s possible to secure a zero percent down payment with an approved VA loan.

 

  • Freddie Mac Home Possible ®. Freddie Mac’s Home Possible lending program is designed to help moderate-income first-time homeowners get a conventional mortgage loan. It’s possible to put just three percent down if you’re approved for this loan. Even if you’re a new borrower with no credit score, you may qualify for Freddie Mac’s mortgage loan program.

 

  • Fannie Mae HomeReady®. Fannie Mae’s conventional mortgage loan program is aimed at low-income home buyers with credit scores of 620+. If approved, you may put as little as three percent down on a home purchase.

 

What Strategies Should I Use to Get a Bad Credit Mortgage Loan?

 

Use these strategies to buy a house with bad credit:

 

  • Apply for a mortgage loan from bad credit lenders. The above list is an excellent place to start.

 

  • Shop lenders to identify the best loan for you. To secure an FHA loan, contact a handful of FHA lenders first.

 

  • Call community banks and credit unions. These customer-centric financial institutions may be more flexible about credit scores.

 

  • Consider an online lender. These banks may offer additional borrowing options.

 

  • Contact a mortgage broker. They will help you find potential borrowers based on your credit scores.

 

  • Enlist a co-signer. A family member or friend with solid credit can simplify the task of getting approved for an attractive mortgage loan. However, recognize that your co-signer will assume the financial risk if you default on your mortgage.

 

Should I Borrow Money to Buy a Home with Bad Credit?

 

Bad credit is likely to make the purchase of your home more expensive. The lowest mortgage loan rates are usually offered to borrowers with the highest credit scores.

 

It’s a good idea to work on your credit scores before applying for mortgage loans. Take the time to dispute any errors on your credit reports now. Doing so will save you money in the long run.

 

What Should I Do to Better My Chances of Getting a Mortgage Loan?

 

Rebuild your credit to improve your chances of getting a mortgage:

 

  • Pay your bills on time

 

  • Pay down a substantial portion of your revolving credit balances, i.e., credit cards, to improve how much credit you’re using (credit utilization ratio)

 

  • Comb your credit reports for errors, including debts that aren’t yours. Request a free copy of your credit reports from the three credit reporting agencies (CRAs)), Experian, TransUnion, and Equifax.

 

Take the following steps to improve your credit scores:

 

  • Decrease your debt-income ratio. This relationship measures how much debt you have relative to income.

 

  • Boost your total savings to have a larger down payment.

 

  • Increase your earnings or get a steady paycheck. Get a better-paying and/or more secure job or take a second side-gig now—the higher your income, the higher your chances of getting approved for a mortgage loan.

 

Questions like how to get a mortgage with bad credit history involve multiple answers. Bad credit doesn’t mean you can’t buy a home. There are many mortgage program options for borrowers with less than ideal credit scores. Before applying for bad credit mortgage loans, take some time to improve your credit. You’ll have more mortgage loan options that cost less.

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