Credit Isn’t Everything
Your lender is interested in your complete financial picture. You can come to the negotiating table with more than your credit score. Here are other factors that can help you gain approval:
Income: if you make six figures, you will have an easier time getting approval than someone with bad credit and low income. However, you still need low debt for this to be true.
Low debt: if your debt-to-income ratio can remain low even with a mortgage, your lender will see this as a good sign. Low debt means lower monthly expenses—and a lower likelihood of default.
Assets: if you have a significant asset, like a well-funded savings account, you can use that as a sort of collateral to back your loan. Lenders like to see reserves equal to three or more months worth of your mortgage payment.
Large down payment: speaking of savings, if you have a substantial down payment, think twenty percent or more, then your lender will be more likely to approve your loan.
Work history: if you’ve been raking in those bills from the same company or industry for years, you’ll be more appealing to lenders. This also means that job changes, unless they’re promotions, are a no-no during the home buying process.
Co-signer: if a relative or friend is willing, you can add a co-signer to your loan. You get the added benefit of their assets and income—but they run the risk of paying out if you default. Be sure you know what you’re getting into before you get a co-signer.
Home Loans for People with Bad Credit
You may be surprised, but most people with low credit scores will find more than one option for a home loan. Credit scores above 580 have many more options than those with scores below. But a combination of assets, income, and an advantageous loan program can still gain approval.
Conventional Home Loans for People with Bad Credit
In the world of conventional loans, subprime loans are the way home buyers with bad credit can get approval. Unfortunately, traditional options don’t offer much. Subprime mortgages often come with high interest rates, adjustable rates that can easily become too expensive, and/or few safety measures protecting the buyer from foreclosure.
Insurify does not recommend using a conventional subprime mortgage as a viable path to homeownership. We recommend that you use another option.
FHA Home Loans for People with Bad Credit
For people with credit below 620, Federal Housing Administration loans are usually the best option. Down-payment requirements are generous, with only 6.5 percent required of buyers with scores of 580 or higher. For buyers with a lower score, only 10 percent is required to buy.
Bear in mind that buyers with scores below 580 will have fewer options when it comes to mortgage companies. Most lenders, especially large commercial banks, will not underwrite an FHA loan for buyers with scores below 580. The minimum credit score for an FHA loan is 500.
Finally, any FHA loan where the buyer puts less than 20 percent down does come with monthly private mortgage insurance premiums. Keep this in mind when you budget for home buying.
VA Home Loans for People with Bad Credit
If you are or have been a member of the United States military, then the Department of Veterans Affairs has options for you. While no minimum is set by the VA, most people with a 620 score or higher will find funding.
Homebuyers will also find leniency when it comes to the down payment, as none is required. Also, no mortgage insurance is required, instead, you’ll pay a funding fee once and never again.
USDA Home Loans for People with Bad Credit
If you’re willing to relocate to a rural area, you may qualify for a U.S. Department of Agriculture home loan. USDA rules for credit scoring are not clear cut, with many lending institutions requiring at least a 640 for underwriting a USDA loan.
However, if you can provide a credit score of 640 you may qualify for zero down in interest. If you can’t, you may be able to find lending if you can provide a substantial down payment.
Government Assistance Programs for People with Bad Credit
If you’re a first-time homebuyer, you will be relieved to know that several local, state, and federal programs exist to help you.
The HomePath Ready Buyer Program offered by Fannie may help people who have not owned a home in the last three years. The program offers competitive mortgage rates and may also help with closing costs. All homes purchased through HomePath are foreclosed properties.
You should also look into local organizations that provide grants to homebuyers. Many municipalities across the country are offering home buying assistance to people willing to relocate. Local non-profits sometimes offer grants for down payments. Contact your local government to learn more.
Finally, your employer may offer home buying help. Some employers offer forgivable loans, while others offer low-interest loans. You may also be able to borrow against your retirement savings if your employer allows you to. Don’t be afraid to ask you human resources representative.