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11 Things You Know About Buying a Home with Poor Credit

Buying a home is a dream for millions, but for those with low credit scores it can seem like their home loan options are limited. However, if you'll remember a few key things you could find much better results from the process and actually secure a poor credit home loan that works for you – despite a low credit score. Here's what to remember.

  1. What Your Credit Impacts – The first thing to understand is just what poor credit will do in terms of your home buying process. The first is that it will have a direct impact on your ability to secure a loan. Your lower credit reflects a higher risk to lenders, which makes them more reluctant to issue you a low credit score home loan.

    Additionally, your loan will generally come with higher interest rates as a result of your credit. You may be able to secure a loan with poor credit, as we'll cover below, but remember that it will usually come with a higher interest rate and other terms that traditional good-credit loans don't have.

  2. Down Payment Basics – Your down payment is directly impacted by your credit, as well. Higher credit scores can often mean lower down payments. In some cases, you'll need as much as 20% of the total home price down, while certain loans could require as little as 3.5% on government loans in particular.
  3. Pre-Approval Letters – Getting pre-approved for a loan can help you have a clearer idea as to what kind of budget you're shopping on and what options you have available. Most banks and mortgage brokers will offer a pre-approval letter with no obligation. Getting pre-qualified on a poor credit home loan is a solid first step that is well worth taking to make sure you're ready to start the home buying process.
  4. Landlord Referrals May Matter – One of the big challenges for many first time home buyers with bad credit is that they have no history of paying a mortgage. To counteract this, turning in landlord referrals to support your ability to pay monthly payments on time and to show that you're responsible is something that many lenders encourage.
  5. Renter History Is Important – Your history as a renter has a big impact on some loans. Bring in proof of your past payments, how long you have lived there, and more. It can help show that you deserve a low rate house loan, even if you have poor credit scores.
  6. Debt To Income Ratio – Debt to income ratio has a big influence on your ability to secure a loan as well. In many cases, this is actually just as important as your credit score. The amount of debt you have versus your average annual income has a tremendous impact on low credit score home loans and your ability to secure them. Pay off existing debts to improve this ratio and get the best chances at a great loan.
  7. FHA – The Federal Housing Administration is a program created where consumers can apply for a government backed loans that are known for offering the easiest path to securing your loan. By lowering down payment requirements and credit score requirements, these loans have made it possible for millions to secure home loans with poor credit that they wouldn't otherwise have been able to get. If you have poor credit and are looking for a loan, they're worth paying attention to.
  8. Employment Records Matter As Well – A long history at your job also has a big influence on loan acceptance. Solid employment history and the ability to prove your income matters dramatically, and can show that you are able to repay the loan you take out.
  9. Credit Repair Starts Early – If you want to go through the process of repairing your credit to improve your loan opportunities, start early. Doing so is key because it can take time to dispute inaccuracies, and done incorrectly can actually have a negative short-term impact on your credit rating.
  10. Saving Up Ahead of Time Can Help – Also, start saving up funds early as well. Having a solid savings is important and can help you pay for down payments or handle repairs if you buy a fixer-upper home.
  11. Fixer Uppers Are Valid Options – Speaking of which, fixer uppers and homes in more rural areas often offer extra benefits since they can be bought using more flexible poor credit home loans. They're worth thinking about for anyone.

If you'll keep these 11 key points in mind, you should be able to start taking the steps now that can have a dramatic impact on your life throughout the future – by helping you secure the home loan that you need. It's important for you be realistic when shopping for low credit score home loans. Your home buying process may not be as smooth or simple as someone with perfect credit, and your interest rate may not be as low. But you do have options, and it all starts with being able to understand the reality of your situation. It's important to remember that you do have options, you just have to know what they are in order to take advantage of them. How to Qualify for a Second Chance Loan for New Home Buyers from FHA.

3 Home Loans for Poor Credit You Should Know

by Jon Silver

People with poor credit often believe that they cannot get a home loan. A few years back, this may have been the case. After the mortgage crash of 2008, lenders got much tighter with credit and would no longer issue mortgages unless you could put a lot of money down and had very good credit.

This was a natural reaction in the markets to a market crash where too many people with poor credit were given low credit score home loans with little money down. Today, things have loosened up a good deal. Many people who have average to poor credit actually have more options than in many years.

Below we highlight some of the options for people who have poor credit and want to buy a home.

FHA Loans Are Your Best Bet

Anyone with poor credit and wants a home loan should first consider getting a loan that is backed by the Federal Housing Administration. FHA mortgages are guaranteed by the US government, meaning that if you don't pay the loan, the government will reimburse the lender, or 'make the lender whole.'

This is important because the government guarantee makes it much more likely that lenders will extend loans to people with marginal credit scores.

FHA loans are available to millions of Americans who would not otherwise qualify for home loan. You may be able to get an low credit score home loan from some lenders with a credit score under 600. It will of course be easier if you have a FICO score of 640 or higher, but a lower credit score is definitely possible and still score a home loan.

Another major advantage of FHA programs is that you can often put down as little as 3.5% down. This only amounts to $7500 on a $200,000 loan, and that is very affordable to many Americans.

FHA mortgages also have flexible lending criteria as far as income and debt to income ratios. If you have poor credit, low income and higher debt, your best bet will be to apply with several FHA-approved lenders. Several may turn you down, but others may accept you.

VA Loans Are Best Bet for Vets

If you are active military or are a military veteran, you really should look closely at a VA loan. A VA loan is guaranteed by the Veteran Affairs Administration. Like an FHA loan, it has very flexible lending criteria, and you can get a loan with poor credit.

The most attractive feature for VA loans is that you can get 100% financing. There are virtually no 100% financing home loans left on the market today other than VA loans.

The VA home loan for poor credit is definitely the best choice for a military veteran with low credit scores.

USDA Loans Are Another Option

The USDA offers home loans for buyers with poor credit and low income who live in designated rural areas. These also are often 100% financing loans and people with low credit scores can qualify.

The only catch here is that not every property will qualify as rural under USDA guidelines. Check with USDA to see if the address of the home you want will qualify as 'rural.'

Candidates for Poor Credit Home Loans

How do you know if you are a poor credit home buyer? The criteria will vary depending upon the lender, but if several of these factors below apply to you, it is most likely you are a poor credit borrower:

  • A credit score that is under 620
  • Two or more late payments of 30 days or more on a mortgage in the last year
  • One late payment of 60 days on a mortgage in the last 12 months
  • A foreclosure or credit charge off in the last two years
  • Bankruptcy in the last two years
  • Debt to income ratio is above 50%
  • General inability to cover your living expenses for a month

How You Can Improve Your Credit

It is possible to get a home loan with poor credit under 640, but it is more complicated and expensive. If possible, you should try to increase your credit score before you apply for a home loan. Here's how:

  • The best way to a high credit score is to pay your bills on a timely basis. Late payments have a very negative effect on your credit score. The longer record you have of paying bills on time, the higher your score. A person with a FICO of 700 can increase their score by 20 points by paying their bills on time for a year. Paying rent and mortgage payments on time are critical.
  • Keep balances low on credit cards. High credit card debt will cause a major hit on your credit score. Alternatively, getting rid of credit card debt can raise your score easily by 20 to 50 points – fast.
  • Do not open more credit cards than you need. A new account lowers the age of your credit lines and will lower your score. This does not mean you should not open cards. But you should only open what is really needed.
  • It is important to have a good mix of installment loans (such as car payments) and credit cards.

Government backed loans such as FHA and VA loans are the best options today for people with poor credit who want to buy their dream home. You should shop around with several lenders today and see which ones offer FHA, USDA and VA loans.

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