Many lenders are reporting easier credit standards with bad credit mortgage programs becoming more available for home buyers and homeowners in 2017.
There are still millions of renters looking to buy at an affordable rate and existing homeowners seeking to refinance with the goal of reducing their housing expenses before interest rates rise.
For potential home owners who have low credit scores, late payments or a high amount of revolving debt, there are more options in 2017 than in years’ past, as many bad credit mortgage lenders arise in the marketplace. These types of loans are usually referred to as subprime loans, and you need to understand the basics of bad credit mortgages to improve your odds of getting one.
How Subprime Lenders Offers Bad Credit Mortgages
Naturally a subprime or mortgage loan for bad credit will carry a higher interest rate because there is a higher risk for the investor. However, how high your rate will be could vary a great deal depending upon your credit profile.
For example, your lender will take a close look at the types of delinquencies that are on your credit report. If you have shown late rent or mortgage payments in the last year, this is more damaging than a late credit card payment. You can help to increase your odds of getting a mortgage by making sure you have no late housing payments on your report for at least a year prior to applying. And two years is better!
Remember Pre-Payment Penalties and Fees
In some cases, mortgage loans for bad credit could have a balloon payment or a prepayment penalty. The prepayment penalty is a fee for paying off the loan before the end of the loan term. This could be incurred if you sell the home or you refinance.
With a balloon payment, you would have to pay off the entire loan at the end of a certain period, often five years. If you cannot pay off the mortgage, you have to sell it or refinance. If you cannot do either of these, you would lose the house.
Under the Trump administration, we could see a loosening up of some of the fees and restrictions with subprime mortgages, but we will have to see what legislation comes out of Washington DC in 2017 before we can draw any conclusions.
If you have bad credit, you probably have a credit score in the low 600s or worse. The lender will review your payment history and see where the problems are. As mentioned above, a late credit card payment or two may not be a big deal, but a late housing payment definitely is.
If your credit score is above 620, you will have more options for a loan than if it is below that.
A great option for a credit score between 580 and 619 is an FHA mortgage for bad credit. The FHA insured loan is guaranteed by the Federal Housing Administration, which is a US government agency. With that guarantee, more lenders are willing to lend to people with average or even bad credit. The minimum credit score on a government mortgage will vary by lender as FHA does not impose minimum credit score requirements. However, most FHA-approved companies do impose their own minimum credit score requirement which typically ranges from 580-620.
If you have a credit score of 620 to 640, you may be able to get a mortgage loan in 2017 for just 3.5% down, and a very low interest rate in the 4s, most likely. These loans also feature flexible underwriting requirements, so you do not need to have a high income or a low debt to income ratio to qualify in many cases.
We think that the Trump administration could make it even easier to get an FHA loan for bad credit in 2017 and beyond, but that remains to be seen.
Refinancing with Low Credit Scores
The most important thing to remember about getting a bad credit mortgage in 2017 is that you may need to refinance it if you have a high interest rate. If you are able to get an FHA mortgage with a low rate, this may not be needed. But if you have a very low score and a high interest rate, you will want to get it refinanced as soon as you can.
So you should work on getting your credit score raised as quickly as you can. You should try to refinance your bad credit mortgage within two years at the most.
Consider an ARM
Most Americans get a 30 year fixed mortgage, but if you have bad credit, you may want to look at other options. You can get a five year ARM. This means you will have a lower fixed rate for the first five years, and then the rate can adjust.
You should use that five years to get your credit in order, and the sooner the better. There is no way to be certain how high rates will climb in the next few years. There could greater economic activity under a business friendly Trump administration, which could drive prices and rates higher. This is a largely good for the economy as a whole, but you would need to pay a higher rate.
Get a Co-Signer
You always can get a co-signer on an FHA mortgage if your credit is too poor, which would typically be 550 or so. Just make sure that you have the financial ability to pay the loan or your relative will be on the hook. Make sure to discuss your co-signing options with a bad credit mortgage lender that is approved to originate FHA programs in your region.
People who have too poor credit to get a regular mortgage loan can get an owner financed property. You will need to put down maybe 10%, and the owner of the home can finance the property to you on regular mortgage terms, such as fixed rate for 30 years. The rate will be high, but you can refinance the loan as soon as your credit improves.
The Bottom Line
You have many options today to get a bad credit mortgage in 2017. Buying a home with bad credit is rarely a simple process, but we definitely see more affordable opportunities on the horizon. We think that it will probably get even easier as the Trump administration starts to change the Dodd-Frank law. Also, FHA guidelines for getting a home loan may be relaxed, and this could make getting a house even easier with bad credit.