Buying a home can be a scary and awesome process at the same time. Knowing what to expect when buying a home with bad credit will help you stay the course and survive the process.
9 Mortgage Loans for Bad Credit
It’s fun to take weekends looking at homes and imagining how you would decorate or remodel but buying a home with bad credit presents a challenge for mortgage loan approval. Here are several lending options for bad credit mortgage loans:
1. FHA loan – 500 credit score (10% down).
The Federal Housing Administration (FHA) is designed to promote loans, especially to low- and moderate-income home buyers. FHA does not directly make mortgage loans, but instead works with approved lenders to guarantee mortgage loans to people with less than perfect credit. The approved lenders have the assurance the FHA loan program will reimburse their loss in the event a homeowner defaults.
2. FHA loan – 580 credit score (3.5% down).
Most lenders that offer FHA loans require a minimum 580 credit score. If your score is 580 or higher, you can put only 3.5% down.
3. Conventional loan – 620 credit score (3% down).
Conventional loans are not backed by any federal agency and most banks offer conventional loans. Because conventional loans are not backed by the government lenders follow stricter underwriting guidelines that require good credit, a strong financial status, and lower loan-to-value ratios. It’s not impossible to get approved for a conventional mortgage loan with bad credit. However, you can expect higher mortgage interest rates and private mortgage insurance (PMI). PMI can be removed after 20% equity is earned in the home. However, if you put a 20% down payment, PMI is not required.
4. VA Home Loans – 580 to 620 credit score (0% down).
VA loans are home mortgages guaranteed by the federal government through the Department of Veterans Affairs. Both active-duty military and veterans are eligible to use the VA loan program to finance the purchase of a home. VA loans do not require a down payment. This type of loan allows for 100% financing all the way through the maximum conforming loan limit in the county in which the property is located. In fact, this type of loan can allow for even higher than the maximum conforming loan limit if you do have a down payment.
5. USDA Loans – 640 (0% down).
USDA Home Loans allow 100% financing for a home purchase, so there is no down payment required. The minimum credit score required for automated approval is 640 and no late housing payments for at least one year. However, there are exceptions made to the credit score requirement for borrowers with thin files.
6. Good Neighbor Next Door – 500 to 580 credit score ($100 down).
Law enforcement officers, firefighters, emergency medical technicians and pre-kindergarten through 12th-grade teachers can get a discount of 50 percent on a home’s list price in a revitalization area. The Good Neighbor Next Door program is sponsored by the U.S. Department of Housing and Urban Development. You must commit to living in the home for at least 36 months so this may not be ideal if you plan to move sooner. If using an FHA loan to purchase a home as part of the Good Neighbor Next Door Program the down payment is $100 and credit score required is 580.
7. HomeReady Mortgage – 620 credit score (3% down).
The HomeReady program helps homebuyers that have strong finances but a low down payment. The down payment and closing cost funds can come from multiple sources, including gifts, grants from lenders or other eligible entities with no minimum personal funds required.
8. Non-QM loan – 500 to 580 (down payment varies).
Some banks and credit unions offer Non-Qualified mortgage loans that don’t meet the lending requirements set by Dodd-Frank Act (2010) that ensure borrowers are qualified to repay their mortgage loans. These types of loans are more popular with the self-employed, retired or contractors who may not have traditional income documentation. Non-QM loans typically have higher mortgagem interest rates.
9. Bank of America Community Affordable Loan Solution™ – No Minimum credit score.
The Community Affordable Loan Solution™ is available for first-time homebuyers in designated markets, including certain Black/African American and/or Hispanic-Latino neighborhoods in Charlotte, Dallas, Detroit, Los Angeles and Miami. The program offers a bank-provided down payment and no closing costs. The Community Affordable Loan Solution credit guidelines are based on factors such as timely rent, utility bill, phone and auto insurance payments. Anyone from any race or ethnicity is welcome to apply.
Shop around for mortgage loans within a 30 day time period
Limit the time period to shop around for a mortgage loan. Lenders must pull your credit report every time you apply for credit.
If you are shopping around with different lenders for a lower interest rate, there is generally a grace period of about 30 days before your score is negatively impacted. Even though each lender inquiry will appear on your credit reports, the FICO scoring system will treat it as one inquiry as long as they are done within a 30-day time period.
Refrain from credit disputes during loan process
Don’t dispute credit accounts during the loan process. When you initiate a credit dispute the creditor places the account in the dispute status, changing the credit reporting to “in dispute.” The underwriting system used by mortgage lenders ignores any accounts in dispute. Because the underwriting system ignores the accounts with the dispute notation, the mortgage lender will not get an accurate credit score.
This may sound good to some homebuyers but there are consequences. Once the lender manually reviews your credit report you will be asked to have the creditor remove the “in dispute” notation. Any temporary gain in credit scores will be lost. The lender requires accurate scores based on all the information in your credit files. The loan process is stalled because the lender has to rerun credit reports.
Don’t apply for new credit accounts during the loan process
If your mortgage loan has not closed, taking out additional debt could change your credit score. The mortgage lender may run your credit report several times during the loan process, don’t mess it up! Taking on more debt will change your debt-to-income ratio and jeopardize your loan approval. As tempting as it may be to start furniture shopping and home decorating – wait until you get the keys to your new home.
Consider a Mortgage Broker
When your situation is outside the norm like being self-employed or retired, a mortgage broker may be able to track down a lender when others turn you down. Mortgage brokers tend to have many contacts. They review your personal financial information and look over an array of lenders and try to match you with one who will give you the best rate and terms.
The advantage is choice because the broker will have lots of lenders to match you with. The National Assn. of Mortgage Brokers at: http://www.namb.org offers referrals. Mortgage brokers in your area may also have insights on state and local first-time home buyer programs that assist in down payment and closing costs in your area.
Don’t forget closing costs
Closing costs include all of the expenses and fees associated with buying a home. Closing costs can come from a lender or a 3rd party for services rendered regarding the home buying process. Here is a sample of who will involved in closing costs:
- Mortgage application fees or loan origination fees
- Inspection fee
- Appraisal fees
- Title search fee
- Recording fees
- Brokerage commission
- Home warranty
- Property insurance
- Property taxes
Here are more tips to prepare your credit files for a mortgage loan.