Searching for a bad credit mortgage can be exhausting If your credit score is cringe-worthy and you’re thinking about buying a house, you may have some legitimate concerns about your chances of getting approved. But fear not: You may still be able to get a mortgage loans for bad credit. However, your credit history will undoubtedly make the application process more nerve-wracking, complex, and expensive. Getting qualified for a mortgage with bad credit could be challenging unless you have strong compensating factors for the lender and underwriter to consider. If you have a low credit score you may need to speak with a bad credit mortgage lender.
More Access to Bad Credit Mortgage Lenders than Ever Before.
Unless you’re in a time crunch, the smart plan would involve devoting yourself full time to fixing your credit. But if you’re in a situation now where renting isn’t a long-term solution, you’ll want to learn more about the steps you can take immediately to improve your credit and make yourself a more qualified to buy a house with damaged credit or an easy qualification for a mortgage with poor credit.
What Credit Scores Are Allowed with Mortgage Loans for Bad Credit?
The interpretation of a low credit score can differ among bad credit mortgage lenders. However, as a general guideline, the FICO credit scoring model categorizes scores below 580 as “poor.” For those seeking a mortgage with a fair credit score ranges from 620 to 660 in most lending circles today. If a borrower has a credit score in the range of 500 to 579, they would need to seek a mortgage with bad credit from lenders that consider strong compensating factors that could mitigate the risks.
How Do Banks and Bad Credit Mortgage Lenders Evaluate your Credit Scores?
When applying for bad credit mortgages, banker and lenders assess your credit scores and overall financial situation. Most lending companies will publish their credit requirements with a range of credit scores that they accept. Additionally, “poor credit” may be associated with a credit history that includes one or more of the following:
- Multiple late payments
- Elevated balances on credit cards and loans
- Delinquent loan payments
- Accounts/Debt sent to collections
Brokers and mortgage lenders place significant importance on your credit score as it reflects the level of risk involved in approving a low-credit mortgage. It’s worth noting that even if two borrowers share the same credit score, they may have arrived at that point through different financial paths, leading lenders to perceive their circumstances somewhat differently.
People with bad credit scores need to position themselves as borrowers that overcame adversity and are now less of a risk. The minimum credit score requirement will vary from lender to lender. (500 -600 credit scores)
What You Need to Know About Getting a Mortgage with a Poor Credit History
Quite simply, a credit score is an assessment of your qualifications and gives an idea of your overall risk as a borrower. Most know it as a three-digit number that can be obtained from one or all of the three major credit bureaus — Equifax, TransUnion, and Experian. The FCRA, or Fair Credit Reporting Act, requires each of these companies to provide you with a free copy of your credit report once every 12 months. That report will likely have a detailed record of your bill payments, but it might also include information on whether you’ve ever filed for bankruptcy or been sued.
What your credit report isn’t obligated to give you is your credit score, also known as your FICO Score. This is calculated with your credit score from the information found in your credit report but is likely to vary slightly depending on which bureau compiles the information.
Credit Score Calculation and Low Credit Mortgages
There are several factors that go into calculating your credit score, but generally, the breakdown looks like this: Your score is based on your payment history, the amount of borrowed money owed, the length of your credit history, any new credit you’ve applied for, and what your credit profile (or mix) looks like.
Your credit score changes frequently, and each ‘category’ that factors into your score will be weighted differently depending on how long your credit has been established. That means if you don’t have a lengthy credit history, your score will be calculated differently than someone who does.
Keep in mind, your credit score is calculated specifically from the information in your credit report. However, when applying for bad credit home loans, potential lenders will also look at other things when deciding if you’re a qualified borrower. They include your current income, your recent tax filings, bank statements, and how long you’ve worked at your job.
On a mortgage application to balance out a bad credit score, you can list assets such as money in your checking and savings accounts, retirement funds, stocks, bonds, CDs, and other investments. It will give a lender a more complete picture of your financial ‘health’ but it won’t replace a poor credit score.
Loans for Poor Credit Borrowers
It’s going to be tough get a home loan with poor credit and lock in a decent rate. Tough, but not impossible. The most important thing to remember is that you shouldn’t jump on a loan with terms that will make it more difficult for you to pay the money back, which will increase your chances of default, foreclosure, and even bankruptcy. In 2023, there are significant opportunities to get approved for a mortgage after bankruptcy.
Bankrate and many other consumer financial services remind borrowers it can take weeks to resolve small issues with your credit, and months or even a year to improve your score overall.
With that in mind, here are some steps to take improve your credit:
- Start by paying down (and eventually paying off) any delinquent accounts, and do your best to get them in good standing.
- Make a schedule of when your bills are due, and then make your payments on time each month.
- Leave any existing credit accounts open, even if you aren’t using them.
- Don’t open any new credit cards, which will result in a ‘hard inquiry’ on your credit report and potentially lower your score.
Credit scores range from 300 to 850, with 300 to 579 ranking as ‘very poor.’ If your score is below 500, there’s very little chance you’ll qualify for a mortgage on your own. Even with a score above 500, a government-backed loan might not even be an option. To fall into that category, you’ll probably need a score of 580 to 669 or better. If you bad credit score is below 500, you may need to pursue a hard money loan.
According to a September 2023 report from software company Ellie Mae Inc., only 6% of mortgage loans for the month went to borrowers with a credit score between 600 and 650. Less than 1% went to those with a score under 650. That means you need to do what you can to resolve credit issues if you’re serious about learning how to buy a house with low credit.
Steps to Take to Qualify for Mortgage Loan with Bad Credit
As we mentioned above, qualifying for home financing with bad credit means you’re taking on a loan that will likely be difficult to pay back. Before you commit yourself to what is essentially a subprime or a non QM loan (or a loan offered to otherwise non-qualified borrowers at a higher interest rate), there are steps you should take to avoid that situation:
- First and foremost, shop around. You should have conversations with as many lenders as possible to determine which ones might offer better financing and are willing to work with high-risk borrowers.
- Consider programs typically used by first-time buyers. These are bad credit loan mortgage products out there (detailed below) designed to address various situations borrowers encounter, including obtaining a mortgage with bad credit.
- Ask a co-signer to put their name on the mortgage if you can’t qualify on your own. Just beware that the co-signer is entering into a binding contract and will be obligated to repay the loan if you default, so consider their responsibility (and your own) before asking someone to make that commitment.
- Make a more sizeable down payment if you’re able to. This might take some of the weight off your credit score and lower your debt-to-income ratio (or the amount of the mortgage against the value of the property), but it’s not a guarantee you’ll automatically be seen as a more qualified buyer.
Popular Bad Credit Mortgage Programs
If you’re a low credit homebuyer, there are programs and services available including those from the Federal Housing Administration (FHA), United States Department of Agriculture (USDA), Veterans Administration (VA), and more to consider. You might also benefit from a Fannie Mae HomeReady mortgage or Freddie Mac’s Home Possible plan. There are guidelines and requirements for each of these programs, but they could be a tremendous help for those needing assistance. If the government and conventional route do not work, consider reaching out to hard money lenders that offer higher risk loan programs. If you do not want to refinance your existing mortgage but need money to pay off debt, consider a home equity loan with bad credit.
FHA Provides Bad Credit Mortgages for Qualified Borrowers with Average and Low Credit Scores
Since 1934, the FHA has assisted millions of homebuyers and is incredibly popular due to its flexibility in working with those who would not otherwise qualify for a loan. In fact, the FHA handbook specifically states that a lack of credit history cannot disqualify a buyer outright. Instead, it says that lenders must consider an overall pattern of credit behavior and can use alternative credit lines (such as utility bills and rent payments) to help establish a borrower’s risk and ability to pay back the money. That means that there are still approved government lenders offering FHA loans for bad credit.
If you’re interested in applying for an FHA loan, you’re required to have a minimum credit score of 580 to qualify for a FHA mortgage with a lower down payment of 3.5%.If your credit score is below 580, you’ll be required to put down at least a 10% down payment to qualify for a loan.
USDA Offers Home Loans for People with Good and Fair Credit Scores
The USDA offers the Single-Family Housing Guaranteed Loan Program, designed to assist the lender (not the buyer) with providing loans for decent, safe, and sanitary dwellings in eligible areas. Potential homeowners must meet a bevy of criteria to qualify for this USDA loan, including a 640 credit score and income eligibility, but the rules are fairly straight-forward. Applicants have to be U.S. citizens or Qualified Aliens, agree to occupy the home as a single residence, and demonstrate a willingness to meet payment obligations.
VA Provides Financing for People Needing Good, Fair and Bad Credit Mortgages
VA home loans are generally only for qualified U.S. veterans and their spouses, or the surviving spouse of a veteran. A VA-backed loan can remove some of the financial hurdles of homebuying, eliminating the need for a down payment and offering better interest rates than bad credit home loans from banks or mortgage companies. The VA program is great for the qualified veterans looking for bad credit mortgages. There is also no need for private mortgage insurance (PMI) or mortgage insurance premiums with this loan.
Fannie Mae and Freddie Mac Offer Mortgages for Fair Credit
The Fannie Mae HomeReady mortgage is geared toward those deemed to be credit-worthy, but low-income. Typically, these are first-time homebuyers with limited means to make a down payment, but with a credit score greater than or equal to 620. First-time buyers through this program are required to take a homeowner’s education course. HomeReady mandates just a 3% down payment and a minimum credit score of 620 for fixed-rate mortgages. Furthermore, it offers more affordable rates for private mortgage insurance (PMI) compared to typical conventional loans. Notably, HomeReady doesn’t restrict eligibility solely to first-time home buying, setting it apart from Freddie Mac’s program.
The Freddie Mac Home Possible mortgage is of similar structure to the Fannie Mae product, but buyers should have a credit score of at least 660. It maximizes credit flexibilities among borrowers and helps those with low-to-moderate income reach their goal of owning a home. One of its main selling points is being a low down payment solution allowing borrowers to have flexible sources of funds to make a down payment.
Beyond these programs, first-time home buyers with low incomes might be eligible for down payment assistance or grants to cover closing costs. A list of state programs is available through the HUD website, and buyers can also inquire through their city or county for assistance programs. If a buyer qualifies for one of these programs, it might make buying a home with poor credit less difficult.
What is Mortgage Pre-Approval?
Getting pre-approved for a bad credit mortgage is essential. The pre-approval letter is a formal document provided by a mortgage lender that outlines the amount of money the applicant is eligible to borrow for a home buying or refinancing and the potential interest rate associated with it. To obtain pre-approval letter, you typically need to submit a handful of documentation such as, pay stubs, tax forms, and employment verification. Once you have met these requirements, you will receive a pre-approval letter for your bad credit mortgage loan. This letter is a valuable tool that allows you to begin exploring homes and making offers.
Are there 2nd Mortgage for Bad Credit?
There are many instance when homeowners have a great interest rate on their first mortgage but they need cash out for debt consolidation, home remodeling or emergency purposes. If you have below-average credit it may not make sense to get a cash out mortgage to meet your needs. Consider a home equity loan for poor credit as this may provide the cash you need to accomplish your goals and getting a second mortgage will enable you to keep your existing mortgage with the great interest rate that remains unchanged.
What Factors Play a Role in the Mortgage Rate?
Fluctuating on an almost daily basis, mortgage rates are influenced by market dynamics, including factors like inflation and the overall economic climate. Although the Federal Reserve doesn’t directly determine mortgage rates, they often respond to actions taken by the Federal Reserve regarding its interest rates.
While market forces contribute to the broader spectrum of mortgage rates, the specific rate applicable to you hinges on factors such as your location, credit report, and credit score. A higher credit score enhances the likelihood of qualifying for a lower mortgage interest rate. Borrowers looking for a bad credit mortgage, typically have low fico scores and will need compensating factors such as, increased equity and strong monthly income.
The Big Decision on Securing a Mortgage Loan for Bad Credit
Every homebuyer looking to obtain a mortgage is in a unique situation and may or may not be eligible for financing. Accepting a mortgage loan under any circumstances is a massive financial obligation that will likely affect you for 30 years or more. No matter what, it will be an extremely heavy burden if your debt isn’t under control.
If your financial situation allows it, consider getting a personal loan designed to consolidate outstanding debt before applying for a bad credit home loan. This will improve your credit and ultimately help you qualify for a mortgage when the time is right. What’s more, a positive payment history can help keep you on the right track as a homeowner, leaving you on solid ground to manage recurring costs and ultimately build equity in your home.
For in-depth guidance on locating the most suitable lender for your particular circumstances, be sure to consult our extensive guide on the most proven mortgage lenders for bad credit. The RefiGuide can connect you with leading lenders specializing in home loans for individuals with poor credit, providing you with the insights needed to make a well-informed choice that suits your requirements. Whether you are buying or refinancing, you need to know the credit rules. Read more about what credit scores are required to refinance a mortgage.
- Check Your Credit Report, Federal Trade Commission, Consumer Information.
- HUD, Borrower Credit Analysis.
- Fannie Mae, HomeReady Mortgage.