With the economy forecasted to improve in 2017, more people want to get a mortgage so they can own their own home. But for many, past credit problems may be holding them back. During the last economic slowdown, many people lost their jobs and their credit took a hit. Some even lost their homes to foreclosure. With a lower credit score, some potential homebuyers might think they cannot get a home loan. However, this is not always the case. Lending standards have been loosening for the last several years. If you want to get a mortgage and have so-so credit, you may have more options than you think. Finding lenders that are more willing to approve a mortgage loan with bad credit can be challenging if you don't go straight to online portals like FTHF that have relationships with second chance lenders. Bad credit first time home buyers need to get organized and put themselves in a position to document to an underwriter that they have strong factors beside the fico score to get approved for a loan.
Lenders Working with More Low FICO Score Borrowers
Right after the last market crash, lending standards tightened and some people with even good credit over 700 could not get a mortgage loan. Things have started to change. As of last year, more and more lenders started to approve more borrowers with lower credit scores. For example, statistics show that in 2014, 33% of closed loans were with borrowers with credit scores less than 700. That compared with only 27% the year before. This year more and more companies have added subprime mortgages back into the mix. Buying a home with bad credit is still possible but you have to work with the right loan company.
Low Credit Score? Consider FHA
Many people do not realize that there are many great options for people with credit scores under 700. One of the most popular lending programs for these borrowers is the Federal Housing Administration (FHA). This is a government agency that does not underwrite loans. Instead, it guarantees the mortgage. In case you default on your loan, the US government will pay back the lender. Because the lender is assured that they will not lose money if you default, lenders are much more willing to offer loans to those with average to bad credit. In many ways FHA wrote to book on how to get a mortgage with a bad credit history. Brokers and lenders have been going to FHA for second chance loans for the last four decades.
For example, there are FHA-approved lenders that will work with borrowers with credit scores as low as 520. Note however that if your credit score is that low, you will probably need a 10% down payment. If your credit is 620 or higher, you may be able to qualify for an FHA loan with as little as 3.5% down. If you have average to poor credit and want to improve your chances of getting an FHA or other loan, experts say to try these simple steps:
by Jon Silver
#1 Pay All Current Bills on Time
If you have some credit problems in the past, these are not usually deal breakers when dealing with FHA loans. Many lenders understand that some people got into trouble in the last downturn due to job loss. Even if you have some black marks on your credit from a few years ago – even foreclosure and bankruptcy – this often is not a problem – IF you have reestablished a steady payment history in the last two years. Really focus on paying all of your bills on time at least a year or two before you want to apply for a mortgage with bad credit.
#2 Reduce Your Loan Balances
If you are paying the minimum payment on six credit cards, many lenders will question if you will be able to pay your mortgage if you experience any financial problems. It is a good idea to get all of your credit card balances to less than 10% of your available credit. This will show that you are financially responsible.
#3 Show Stable Rent Payments
Even if you have bad credit under 640, you should be able to be approved by some FHA lenders. To increase your chances, you will want to show that you have paid your rent on time for 12 months. In many instances, the lender or bank will want to verify rent payments from the previous year.
#4 Put Down More Money
If you have poor credit under 600, you will greatly improve your chances of getting a loan if you put down at least 10% on a loan. FHA, Fannie Mae and several subprime lenders offer bad credit mortgages to borrowers that have the ability to come up with a more significant down-payment. Many private lenders will be more likely to approve mortgage loans for bad credit to an applicant willing to put more money down.
#5 Show Steady Bill Payments
If you do not have much credit history, you may be able to show the lender that you have paid your utility bills on time. Underwriters clearly appreciate it when an applicant has the ability to show a pattern of timely payments.
#6 Explain a Low Score
There are cases where a low credit score may have a legitimate explanation. For example, some people may have had a serious illness and they have a large medical bill that they cannot afford to pay. This is much more understandable from the lender's perspective than, say, a default on a car loan. There are still subprime sources that extend mortgages for bad credit.
It is much easier to get a mortgage with bad to average credit in 2017 than it was five years ago. If you can show that you have stable income, a down payment and a credit score of at least 600, you probably can find lenders that will work with you. Just make sure that you are paying all of your bills on time and you have not maxed out your credit cards before you apply for a loan.
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