Maybe you’re in a shared living situation (that is, living with an adult who is not your romantic partner) due to a financial crisis, or you’re a renter under less-than-ideal circumstances pining to become a homeowner. Perhaps you’re sitting on a mountain of student debt, or medical bills, or so many other incurred monthly expenses that the prospect of home buying simply doesn’t seem viable.

If any of these scenarios pertain to you, you’re facing the same roadblocks that many would-be homebuyers are facing. The first is the ability to save up for a substantial down payment and closing costs for a mortgage. The second is much more psychological — the fear of not being able to qualify for a loan based on your credit score.

The reality is that most people don’t realize there are programs that allow for a limited down payment and eliminate many out-of-pocket expenses, including closing costs.  They don’t understand there are loans tailored to help people with qualifying income requirements and maximum loan amounts. They may have done their homework two or three years ago and found that credit quality-based constraints were a huge barrier to the dream of homeownership.

Not anymore.

Many lenders are now putting their focus on credit-challenged borrowers and are no longer considering your credit score as an insurmountable obstacle to the attainment of homeownership.

What is a Subprime Borrower?

When you have impaired credit and you’re applying for a mortgage, you may feel there’s a label affixed to your application that you can’t get rid of — that of “subprime borrower.”

Experian, a major consumer credit reporting company, defines a subprime borrower as someone whose credit score would indicate a moderately high risk of failure to repay a loan. Experian lumps those with a FICO® Score of 580 to 669 in the “subprime borrower” category, but different lenders define the same borrowers according to their own criteria.

What used to be the case is that subprime borrowers were less knowledgeable about the mortgage process. In turn, they were less likely to search for better mortgage rates, and less likely to be offered alternative mortgage terms and programs. Now, there are home buyer loans available that are specifically designed to keep buyers away from unfavorable mortgage outcomes.

Best Loans For First-Time Home Buyers With Bad Credit

Say it with us: Just because your credit score is low doesn’t mean you need to give up on your dreams of homeownership. Financial missteps can be fixed and forgiven, and a number of options exist to help first-time buyers boost their credit scores and find a loan that will guarantee fair terms and affordable funding.

  • FHA Loans – The Federal Housing Authority has issued new guidance over the last several years on the credit scores needed for FHA home loans. The minimum credit score requirements depend on which loan product you apply for, with maximum financing generally granted to applicants with a credit score of 580 or better. Those with lower credit scores will need to make a larger down payment, and applicants with a minimum credit score of less than 500 are not eligible for FHA loans. But what you really need to know is that the FHA makes allowances for loan applicants worried about their credit. You can and should request help through the FHA for credit counseling or first-time homebuyer counseling to get started with the mortgage process.
  • VA Loans for Veterans With Bad Credit – Are you a military veteran, married to a veteran, or a dependent living with or caring for a veteran? There are so many scenarios applicable to our nation’s servicemen and women when it comes to home buying. VA loans (guaranteed by the U.S. Department of Veterans Affairs) were designed to make borrowing accessible to those with less-than-perfect credit. While there a number of boxes that need to be check marked — namely satisfactory payment history and anticipated income — there are VA loans for those who have no credit or a score less than 620. In those cases, qualification is determined by your past payment history of rent, insurance, and other monthly expenses.
  • USDA Loans – The U.S. Department of Agriculture backs loans that come with lower credit standards and income requirements than other types of mortgage loans. The caveat to getting one is that they’re generally limited by income and property location. The home typically has to be in an eligible rural area as defined by the USDA.  Additionally, while the USDA does not have a minimum credit score requirement, most USDA lenders will require a credit score of at least 640, which is the benchmark for the underwriting system. Lenders also typically look for both a strong payment and employment history and debt-to-income ratio.
  • GNND Loans – From the U.S. Department of Housing and Urban Development (HUD), the Good Neighbor Next Door program offers a 50 percent discount on the list price of a home for those with full-time jobs as first responders, such as law enforcement, firefighters, and EMTs. Teachers who are pre-K through grade 12 can also take advantage of this program. The property must be the sole residence for 36 months after purchase, with participants required to recertify every year that they’re living on the property. There are also other eligibility requirements, with questions best answered by one of HUD’s Loan Servicing Contractors.
  • Fannie Mae HomeReady Loans – As the slogan suggests, you can make “Home Possible” with a Fannie Mae HomeReady™ Loan, which is a low down payment mortgage geared toward creditworthy low-income borrowers. This loan requires a down payment of just 3 percent. In addition, the program factors in the income of a non-borrower also living in the household, regardless of their credit score. Most lenders will require a minimum score of 620 from the borrower in order to qualify for HomeReady™, but it comes with flexible funding and cancellable mortgage insurance once home equity reaches 20 percent.
  • Freddie Mac’s Home Possible® Loan –  What makes the Home Possible® loan a little different from the HomeReady™ loan is that it’s available for both low and moderate-income borrowers, but also allows for a down payment of just 3 percent. The bigger difference is that co-borrowers who will not live in the home can be included in the loan application. Borrowers can also qualify for a loan with reduced PMI rates, but many lenders require a 620 or better credit score to move forward with a loan application.

Other Alternatives for Homebuyers with Low Credit Scores

FICO (originally Fair, Isaac and Company) has a credit scoring rate of 300 to 850. Even if you’re on the lowest end of that spectrum, it doesn’t erase your home-buying hopes. There are other options on the table than those mentioned above, including what’s known as a non-qualified mortgage loan. This type of loan is for anyone who does not have the necessary documentation to prove they are capable of making mortgage payments (or for those with other unique circumstances); Another option is a portfolio loan, which the lender keeps on its own balance sheet rather than selling it on the secondary mortgage market.

Additionally, there are a number of state and community programs out there available for and specifically open to first-time buyers. These include education classes, programs for information about down payment assistance, and workshops to help people plan for homeownership even if they aren’t ready immediately. Experts say these should not be looked at as “social services” but for understanding all the nuances of loan programs.

Finally, there are organizations out there such as NeighborhoodWorks America, whose singular goal is to create opportunities for people to live in affordable homes and improve their lives. Its network — comprised of more than 240 community development organizations and an existing support structure – offers counselors who are trained and certified to provide education to prospective homebuyers. That education primarily focuses on an individual’s unique financial circumstances to help them achieve their goal of homeownership.

It’s Not Impossible To Get a Mortgage With Bad Credit

Remember, your credit score is just one piece of a very large puzzle that shows how you’ve managed to prioritize and pay off existing debt in the past, as well as how you’ll fare with a mortgage payment in the future.

For any mortgage lender, your credit score ultimately represents a big part of your ability to pay back the money you’re borrowing. While lower scores generally give lenders pause and cause them to examine your application more stringently, it’s not the only determining factor in getting approval.

Your credit score is certainly going to play a key role in what type of loan you can get and what rates you might qualify for, but every lender sets their own criteria for evaluating credit. While one lender may consider only borrowers with 580 scores and above, the next may accept a score lower than 580.

First-time buyers especially should understand the multitude of options available for those with bad credit. Doing your homework, shopping around and choosing the mortgage product that’s right for you will set you on a solid path to owning a home and keeping current with mortgage payments.

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