Think your bad credit will stop you from becoming a homeowner? Think again.
A bad credit mortgage is the key to homeownership for those with bad credit or those who’ve suffered a severe financial event in the past ten years. These mortgages are explicitly designed for people who have a credit score of 600 or below.
Can you afford a mortgage but aren’t sure where to get one? Keep reading to learn more about securing a bad credit mortgage.
5 Tips for Finding a Bad Credit Mortgage
Buying a home isn’t impossible if you have bad credit or even no credit. Here are five tips for getting into your first house even with a rocky financial history:
1. Start by Assessing Your Credit
Do you know your credit score? If not, you may be in for a surprise.
Checking your credit score once every six months is free making sure you have seasoned tradelines. It’s a good idea because it lets you know precisely where you stand and what you qualify for.
In some cases, your credit may be better than you expect. For some, the outcome may be worse.
Regardless of where you stand, seeing your credit score will also show you how to improve. If you’ve been dinged for missed payments, you’ll want to find a way to prioritize payments through an auto-pay feature or by carefully setting aside the minimum amount from your paycheck. If it’s because your debt-to-income ratio is too high, you’ll need to pay off some debt before you apply.
Whatever your score, you can’t fix it until you understand it. That’s why a credit assessment is the first step to securing a bad credit mortgage.
2. Get Help from Government Programs
Homeownership is important to the federal, state, and local government. Each level of government has programs in place to help low-income and poor-credit applicants apply for a mortgage.
While programs differ by city and state, federal plans remain the same. Here are some of the programs offered by the federal government:
- Rural Housing Loans
- Veterans Affairs Loan Management
- Department of Veterans Administration Interest Rate Reduction Loan
- Home and Property Disaster Loans
- Direct Home Loans for Native Americans
Want to learn more about other loans in your city or state? Ask your local HUD office about available programs.
3. Choose an FHA Loan
Federal Housing Administration (FHA) loans fall under government programs, but the range of available loans is wide and open to any employed American, so they deserve their own space.
There’s a misconception that a conventional loan from a private lender is the gold standard in mortgages. But not only do traditional loans veer away from anyone needing a bad credit mortgage, but they also don’t necessarily compete with the terms offered by programs like the FHA.
FHA loans are for people who:
- Have bad or poor credit
- Can’t afford a large down payment
- Stick to property rules
The FHA requires a minimum credit score of 500 to apply for a mortgage with a 10% down payment.
If you want a lower down payment of 3.5%, you’ll need a minimum score of 580. However, you’ll still find that lenders prefer a credit score of at least 620 to qualify.
FHA loans are ideal for low- to middle-income homebuyers, but there are strings attached.
While the terms may be more favorable, your property choice will be limited. You’ll be required to buy a property that features a payment within a debt threshold.
4. Fulfill the Other Requirements
Your credit score doesn’t need to break your mortgage application. If you have bad credit, you can use other means to help qualify for a loan.
Save for a Down Payment
First, save for a more substantial down payment. If you can put down 20% on a loan, then some lenders are more amenable to granting you better terms. Larger down payments are also ideal because you’ll save money on private mortgage insurance and interest on the 20% down over the course of the loan.
Then Save More
A large down payment isn’t enough to offset a lousy credit rating. That’s why you also want to show up with some extra cash in the bank. Handing over your down payment shouldn’t leave you broke. Lenders want to know you can afford homeownership after you move in.
Plus, those with a positive checking account balance are more likely to look like they can afford the mortgage once the first few payments are due.
Explain Your Circumstances
It’s easy to wreck your credit; it’s much harder to rebuild it.
If your bad credit score is the result of extenuating circumstances, let the bank know. After signing a contract did you learn more and realize you fell for a scam? A six month period of unemployment can also undo an otherwise healthy credit score, but if that six months was uncommon and are unlikely happen to happen again, the lender may consider it to be extenuating circumstances.
These circumstances are looked on more favorably than poor credit caused by living outside your means.
Write a letter to explain what happened, then back it up with documentation. If you were fired, provide evidence of unemployment. Did a severe illness result in loss of income and medical debt? Provide proof.
Don’t forget to show how those circumstances are unlikely to happen again. Proof of medical insurance or an employment contract may boost your chances
5. Keep Working on Your Credit
Even when you secure a bad credit mortgage, you may find the terms aren’t entirely in your favor. But once you’re in your new home, you can fix it.
Start by making sure your mortgage payment is made on time every time. It sounds like a no-brainer, but unlike other bills, missing a mortgage payment can leave a substantial ding on your credit report.
Then, renew your focus on improving your credit. A better score and increased cash flow will help you qualify for a refinancing package down the road, which could relieve a serious interest burden.
You CAN Buy a New Home
Homeownership isn’t limited to people with perfect credit. In fact, there are plenty of options available to those with bad or even no credit, and they come from the government – not predatory lenders.
If you’re hoping to transition from renting to ownership, try these five tips. Don’t forget to share your own money tips in the comments below.