Over 20 percent of people in the U.S. have credit scores lower than 600. This level of credit score is called “subprime.”
Unfortunately, most conventional mortgage lenders do not even grant optimal rates to borrowers with credit scores below the average score of 675. What is a person with a low credit score like this to do if he or she wants to buy a home? Fortunately, you can still get a mortgage even when you have bad credit. You must simply know where to look and accept certain limitations and restrictions that come with the mortgage.
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Typically, getting a mortgage with bad credit requires making sacrifices. You may have to pay more toward the home purchase up front or more in payments beyond the purchase price over the term of the loan. There are some government programs through which you could get approved for a mortgage as good as or better than a conventional mortgage for a person with good credit, if you qualify.
The more cash you agree to put down toward the purchase of a home, the smaller the percentage of the home’s purchase price you need to take out in a mortgage loan. A loan, for example, for only 70 percent of the price of a home is much easier to obtain approval for with bad credit than a loan for 95 percent of the home’s purchase price. Try to put down at least 20 percent as a cash down payment in order to be approved for a mortgage with bad credit. The worse your credit, the more you should be prepared to put down as a percentage of the total purchase price of the home. This improves what is known as the Loan to Value (LTV) ratio on the transaction, a factor that can influence heavily whether you get approved for the mortgage, especially with bad credit.
Higher Cost Mortgages
If your credit is too poor to qualify you for a conventional loan at a low interest rate, you may still qualify for a mortgage with a higher interest rate. You may also qualify for a mortgage if you pay private mortgage insurance (PMI) or pay additional “points” on your mortgage. All of these options cost you more over the life of the loan, but at least they allow you to take out the loan in the first place. The extra cost paid out over time may be money well spent.
Many government programs offer certain groups better deals on home mortgages, including more flexible and lenient standards to qualify. FHA loans and VA loans are among the most common of these programs.
FHA loans are issued by the Federal Housing Administration of the United States Department of Housing and Urban Development. It offers mortgages with low down payments and easier qualification requirements, including lower or no credit requirements. In exchange, borrowers pay mortgage insurance to ensure the lender’s payment if you default on the loan. As of this Fall 2018 writing, FHA loans are approved for borrowers with credit scores down to 580 with 3.5 percent required as a minimum down payment. It is possible to receive approval for an FHA loan with a credit score as low as 550 if you agree to pay at least 10 percent as a down payment. To receive approval for an FHA loan, your debt to income ratio, or how much you owe compared to how much you earn, should not be higher than 45 percent.
VA loans are available to veterans and active duty members of the U.S. military. Like FHA loans, VA loans are also easier to apply for and get you into a home for less money down. They do not require you pay mortgage insurance, however. VA loans could even pay for 100 percent of a home’s purchase price, with no down payment required.
Some lenders grant you a mortgage, even with poor credit, if you can prove you have consistently paid your rent on time for one to two years. Fewer than one percent of credit reports contain entries regarding rental payments, however, so you likely need to employ a fee-based service in order to have your rental payments reported to the credit agencies. Be sure, before signing up for any of these services, you understand fully the details of the given service, such as:
- The total costs per year for service.
- How the company protects your personal data.
- Whether the service includes free access to your credit scores.
- How quickly your rental information appears on your credit reports.
- On which credit reports your rental information appears.
- How you can cancel the service.
Many lenders approve mortgages for people with bad credit if a person with good credit agrees to cosign the loan. The cosigner need not be a relative or even plan to live in the home. He or she does, however, agree to pay back the mortgage, if you default on the loan. Even if the home experiences foreclosure, if the foreclosure fails to bring in enough money to pay the remainder on the loan, you and the cosigner can both still be accountable for the difference. Even missed or late payments show up on not just your credit report but your cosigner’s as well. Therefore, when having another person cosign your loan, make sure you are able to make the payments on the loan as agreed so you do not damage your cosigner’s credit.
When all else fails, sometimes a simple, honest explanation of your circumstances can help a lender decide to give you a mortgage after all, even though you have bad credit. These may be circumstances leading up to your poor credit, such as a marriage gone bad or a child’s unexpected hospitalization. They may be circumstances necessitating your home purchase, such as the demolishing of your home or having the home claimed under Eminent Domain. Perhaps an elderly relative moves in requiring you to move to a larger home. Not all lenders take this information into account equally, but it never hurts to lay your cards on the table and ask.
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