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. The interest rates on mortgages with bad credit scores remain surprisingly low and the lending standards are more flexible than they have been in years.
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 Mortgage 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 and 2018 before we can draw any conclusions.
If you have bad credit, you probably have a credit score in the low 600’s 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 home mortgage 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 4’s, 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 mortgage loan for bad credit in 2017 and beyond, but that remains to be seen. See what you qualify for and apply for a FHA loan today.
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.
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.
How Subprime Mortgage Loans Help People with Bad Credit Get in Home
The subprime mortgage market was pretty much out of business after the 2008 market crash. These days, however, lenders are singing a different tune. More and more mortgage lenders today are offering subprime mortgage loans to help people with bad credit to buy a home.
Even if you have a foreclosure or bankruptcy, you still may be able to get a subprime mortgage loan in 2017. It is true that the standards are more rigorous now than in the height of the real estate boom. But there are several factors at work that will help you get a loan with bad credit in the subprime market:
Must Have Down Payment
Do you remember the days when you could get a loan with average to bad credit and put no money down? How about getting a mortgage without documenting your income? It is much more difficult to do these things.
But you can get a subprime loan with average to poor credit if you have something to put down. Generally, you will need at least 3-5% down to get a loan with bad credit. Some people don’t like having to put money down, but forcing people to have cash in the deal makes it safer for investors and for the markets.
FHA insures many loans from bad credit borrowers in the range of 500-640 FICO scores. You have to put down 10% if you have less than a 580-credit score.
So, you can get a subprime mortgage, but you need to have at least a small down payment. This helps you because it reduces how much your mortgage is, anyway.
Must Have Documented Income
Yes, you can get a loan with below average credit. But no, you cannot usually get a mortgage loan unless your income is documented. We think that this is a good idea. The problem during the market crash was too many people were trusted to pay loans that did not have any income documentation backing them up.
Most people when presented with the keys to a home beyond their financial means, will go ahead and sign the papers and hope for the best. The result was the mortgage meltdown.
Today, you can get a loan if your credit is in the low 600s. But you have to show your income in bank statements, tax returns, pay stubs etc. This makes sense – do you really want to get a home loan for a house you can’t afford? Talk about stress!
Mortgage Rates for Bad Credit Borrowers Are Super Low Historically
Rates went up in early 2017, but have actually declined in recent months. As of this writing, it is still possible to get an FHA loan for a bad credit borrower around 4%. What a fantastic deal! Imagine that you can get a subprime mortgage loan with a rate that low.
You will have to pay for mortgage insurance, but which you prefer: rent for the next several years while trying to get your credit score up for a conventional loan, or buy today and pay $100 per month in mortgage insurance? We go for option #2.
More Subprime Lenders Offering Bad Credit Mortgages Today
Right after the mortgage crash, there were few options for people with credit less than stellar. Today, markets have loosened and you can get many loans with average to bad credit.
A big reason for this is that the US government now requires that lenders follow certain standards when it comes to evaluating the creditworthiness and income of a borrower. All borrowers have to clearly document what they earn and where they are getting their down payment from. This keeps everyone in the transaction honest, and you know for sure that you can afford the home you are buying.
Debt to Income Ratios Are Easier to Qualify for
After the mortgage crash, lenders wanted to see a low debt to income ratio. But now, lenders are getting looser with these requirements. Some loans, such as FHA, can be green lighted even if you have a DTI up to 50%. You may need to have a higher down payment or credit score to make that happen though.
Takeaways on Today’s Bad Credit Mortgage Programs
Today, people with bad to average credit have many more options than they did eight years ago. Even if you have a bad credit event in the last few years, you still may be able to get your loan approved.
What bad credit mortgage lenders want to see the most is that you are getting back on your feet financially. Even if you had a foreclosure three years ago, many subprime lenders will overlook it, IF you can show that you are financially stable for the last one or two years.
Financial stability and a clear source of documented income is more important for a subprime loan than what your credit score is. If you can keep all of the above in mind, we think that you will be well situated to get approved for a subprime mortgage soon!