by Tom Murphy
NMLS # 662141
– Home Services Lending –
Many people who have bad credit still want to buy a home, but how do they qualify if they have low fico scores, late payments, etc.? Clearly, paying rent every month – which is effectively paying the mortgage for your landlord – is not what most of us want to do year after year.
For most Americans, owning your own home is still part of the American Dream, even with damaged-credit. If you have a low FICO score, there is no question that it will be harder for you to qualify for mortgage with a poor credit history, but there still are some ways that you may be able to buy a home, don’t worry.
Many national banks would rather not take risks by promoting poor credit mortgages to new house buyers, but that doesn’t mean there are not lenders that do extend mortgages to people with low credit scores.
Some of the most common challenges that potential home-buyers have qualifying for a mortgage with poor credit include the following:
#1 Low FICO Score
Obviously, bad credit means that you have a low FICO score. Credit scores range from 350 to 850, and the closer to 850 you are, the higher your score. For buyers who have bad credit, this typically means you have a credit score that is well below 700. Buying a home with bad credit can be a stressful process if you don’t align yourself with competent mortgage companies.
If your score is in the 620 to 640 range, you will have fewer options to get a mortgage. This is the case because people and companies that offer loans to home buyers to buy a home are investors.
If you are a lower credit score, there is statistically a higher chance that you will default on the loan, and the note holder on the property will need to sell the house to get their money back.
Generally, you will want to have a credit score above 680 to get a better choice of mortgage lenders to offer you a loan. If you have a credit score under 620, you still may be able to qualify for a FHA mortgage with poor credit through the federal government, but you will need to put down at least 10%.
To get the best rates and low money down deal with an FHA program, you should have a credit score above 640. If you can get your credit above that level, you may be able to put down only 3.5%. Locating bad-credit mortgage lenders that provide affordable financing opportunities is not always so easy. Start your search reviewing lenders and brokers on websites like RefiGuide.org.
#2 Recent Job Loss
The biggest requirement for people to get a loan, outside of a good credit score, is to have steady employment. You need to be able to show that you have the means to pay regularly on the loan. If you have a job loss in the recent past, this may have affected your ability to pay your bills and it could have lowered your credit score. A job loss will make the mortgage lender look closely at your ability to pay back the loan.
Losing a job combined with a bad credit score can prevent many people from getting a loan. The good news here is that once you get a job again, it only takes a few months to reestablish a steady work history that many lenders will accept.
In some cases a letter from your new employer outlining present and future compensation can go a long way with an underwriter that is manually evaluating your loan request. Typically the letter you supply would be verified with your human resources department.
#3 Bad Marks on Your Credit Report
Your FICO score is not the only thing that matters for people with bad credit. If you have a regular history in the last few years of not paying your bills, this often will show up as late payments on your credit report. The more 30 day late payments you have on your report, the more difficulty you will have qualifying for a mortgage with low credit.
If you want to improve your credit score and get a mortgage, it is critical to stop making 30 day late or worse payments on your bills, car payments, credit cards etc. Once you are able to show that you have had no late payments on your report for at least a year, you will be more likely to qualify for a mortgage with poor credit scores.
If you expect a lending company to consider your submission for what most banks would deem a high risk mortgage, then you need to provide strong compensating factors. The Federal Housing Administration encourages mortgage companies to consider the borrower’s complete credit and income profile rather than solely relying on the credit report issued by Trans Union, Equifax or Experian. The underwriter that has the power to approve or deny your application for a bad credit mortgage must feel confident that you are less of a risk than your credit score indicates. Read our credit guide on mortgage loans in 2018.
#4 Trouble Coming Up with Down Payment
If your credit is in the toilet, it probably means you do not have much money in the bank. This means that you may not be able to put enough money down to get a loan. Many home loans require 20% down to get a loan, but these days, there are FHA and conventional loans that offer 3.5% or 5% down in many cases. Unlike a decade ago, buyers will have trouble finding zero-down home loans if they have low credit scores.
The lower your credit score, the harder it will be to qualify for these low down payment loans. Once you are able to get your credit score above 640 again, you will more easily be able to qualify for a loan with a lower down payment. Many believe that buying a home with bad credit will get a little easier with the Trump Administration. FHA, Fannie Mae and Freddie Mac have already signaled that they will be raising loan limits in 2018, so that is a great sign.
#5 Foreclosure or Bankruptcy on Your Credit Report
There are some home loans that you can get if you have a foreclosure or a bankruptcy on your credit report, but it will make it more difficult. This is especially the case if the foreclosure or bankruptcy is in the last year. Generally, it is a smart idea to wait at least two years after a bankruptcy or foreclosure before you qualify for a home mortgage loan with poor credit in your past. You need to show on your credit report that you have financially recovered. Find out how FHA is taking extra steps to consider people with credit problems.