How to get a mortgage with terrible credit
Tips for getting a mortgage with bad credit
Are you looking to buy a home for the first time but don’t have the best credit? Anyone can find themselves in a bad financial situation. Whether it is because of their own mistakes or a situation beyond their control, it can lead to credit difficulties. Having a bad credit history will make it more difficult to approve a mortgage. It doesn’t matter if it’s a construction loan to build your own home or a traditional mortgage to buy a resale property.
Even if you have more difficulty convincing a lender that you are an acceptable risk, it is still possible to get a bad credit mortgage. We show you what you can do to improve your ability to buy a home even with bad credit.
What is bad credit for a mortgage?
A low credit score or a significant negative financial situation, such as buying a house that has been foreclosed, could be a problem for lenders. So if you have gone bankrupt or have a foreclosure, it will hurt your chances of getting a mortgage. Even if your credit rating is good, you will have to wait a few years or more before you are considered eligible for a mortgage.
Lenders follow guidelines set by government agencies and government sponsored companies. These organizations have different FICO credit score requirements and wait times for major negative credit events.
Credit information is passed to the three major credit bureaus, including Equifax, Experian, and Transunion. These agencies provide information to lenders who will take out loans for those who buy homes.
Let’s take a look at the types of loans you can get when your credit score isn’t the best.
Get an FHA loan
To be eligible for a Federal Housing Administration bad credit loan, you need a credit score of 500, which will require a 10% down payment. To qualify for a down payment that is 3.5% lower, you need a score of 580.
You have to wait one year after a Chapter 13 bankruptcy and two years for Chapter 7. There is a 3-year waiting period for foreclosures.
Get a USDA Guaranteed Mortgage
If you are low income, a USDA loan with a score of 640 or even as low as 581 under certain circumstances will allow you to buy a home. The wait time after an adverse credit event is similar to that of the FHA.
A USDA loan is only available in rural areas. Generally speaking, the population to get a USDA loan must be less than thirty thousand.
A VA loan could be a great option
For active duty or military veterans, the VA offers a lot. They don’t have formal credit score or minimum down payment requirements, nor do they need you to pay for mortgage insurance. While there is no set score requirement, lenders typically require 620 for VA loans.
If you have a bankruptcy case, you should wait the same time as with the FHA. Seizures only need a 2 year wait, however, the lowest on this list. However, they need you to be clear of tax liens and judgments.
To be eligible for a Veterans Loan, you must be in service or have served in the military. USDA and VA loans are two of the mortgages available with no down payment requirement.
Fannie Mae and Freddie Mac
Fannie Mae offers down payments as low as 3% if your score is 620 or more. They will require you to pay for private mortgage insurance if you put less than 20 percent. This insurance protects them, but it is expensive for you, and the lower the down payment amount, the more you will have to pay. You will be able to get rid of the PMI as soon as you have obtained twenty percent of the equity in the property.
Freddie Mac has mortgages for people with scores of 660. For both government sponsored organizations, you will have to wait at least two years after discharge from bankruptcy and seven years for foreclosure. If you have any tax liens or judgments against you, these will need to be fully paid before you are eligible.
Mortgage interest rates for bad credit
If you have a bad credit history, you will be considered a higher risk by the banks. And with higher risk, banks will charge more interest on your loan. Even a fraction of a percent difference means you’re paying thousands of dollars more over the life of the mortgage.
Improving your credit score gives you a better chance of getting a lower interest rate from lenders.
Improve Your Chances Of Getting Bad Credit
There are things you can do to improve your chances of getting the mortgage you want, even if you have very bad credit.
Increase your deposit
If you can do this, saving a larger amount of money for the down payment will increase your chances of being approved by a lender. Although it may seem complicated, cutting your expenses and saving money in a bank account for the sole purpose of improving your situation. Additional work and regular payments to this account will increase your down payment, showing the lender that you are less risky.
Many people don’t realize that they can also get a down payment from a parent. Unfortunately, getting a down payment is not strongly encouraged by lenders or real estate agents. It really should be mentioned as an option a lot more often.
Checking Your Credit Reports
If you haven’t checked your credit reports, you should. There could be things in the reports that are not correct that are affecting your score. The credit bureaus hold information about you, and if it is incorrect or out of date it could affect the way you view lenders. Getting your credit report is easy and free once a year from all three reporting agencies.
If something is wrong with your report, you can issue a dispute with the office. Once the issue is resolved, your score should improve.
Credit Counselors or Credit Karma Can Help
While you may not know what to do to improve your score, even after reading your credit reports a counselor will. They can look at the details of your financial history to change the direction your score is going. Another great option is to use Credit Karma. One of the most beneficial features of Credit Karma when buying a home is showing you exactly how to build your credit score.
In fact, they’ll show you exactly how your credit decisions will impact your score. For example, what would happen if you closed one of your credit card accounts? People do things all the time that unknowingly will have a negative impact on their credit situation. Credit Karma shows you what not to do!
Dealing with debt
If you have debt, the lender will look at the relationship between that debt and your income. They take the amount of debt, including the mortgage payment, and divide it by your monthly income.
If your debt-to-income ratio is too high, it’s best to pay off the debt before you apply for a bad credit mortgage. You can also increase your income to improve the ratio.
Your history of paying off debts is also taken into account. If you frequently make late payments, it will not improve your situation. Get back on track with on-time payments for at least 3-4 months before attempting a loan.
Co-signers could be an option
A co-signer on your loan could help you get a mortgage if they have a better credit rating. However, this is a significant risk for them. If you miss payments, their credit score will be damaged and they will ultimately be responsible for the loan. Parents often co-sign a child’s mortgage.
Final thoughts on getting a mortgage with bad credit
While it is more difficult to find a mortgage lender willing to help you when you have terrible credit, it is far from impossible. The worse your credit situation, the higher the interest charges you can expect.
If you can take steps to improve your situation, a mortgage application will have a better chance of being approved and you can also lower your monthly payments.
Hope you have found this information on getting a mortgage with bad credit useful.
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