Top Ways of Qualifying for a Home Loan with Limited Credit or Low Credit Scores

Many people think that getting a home loan with a low credit score today is impossible. But this is not the case.

According to some estimates, 21% of Americans have credit scores below 600, which is subprime. Even a credit score of 675 is too low to get the best interest rates on a conventional mortgage.

But there is good news: It is possible to get a home loan with limited credit or low credit scores. As a matter of fact, government backed programs such as FHA and VA home loans, and also lenders that specialize in lower credit such as Quicken Loans and Carrington, make it easier than ever to get a home loan with bad credit.

In the last few years, the credit markets have loosened up and there are more credit options for people with low credit scores who want to become home owners.

Here are some of the ways you can still get a home loan with a low credit score:

More Cash

Mortgage lenders generally look at three things when they decide on your mortgage application: Your debt to income ratio, your credit score and loan to value on the property.

If you have a low FICO score, you may be able to help this by putting more cash down and improving your LTV. A bigger down payment can make you a more attractive borrower to lenders; you will not need to borrow as much money for the purchase and you will have more equity in the property. This makes you a lower risk.

Another option is to get down payment help from your friends or family. Most lenders are ok if you do this, but you need to get a letter from the person stating that it is a gift. If you get a gift of cash for a down payment, it is important to deposit it in your account as soon as possible. The lender will want to see where the money came from and that it has been in the account for at least 60 days.

Government Backed Loan Programs

Many people with lower credit scores assume they cannot get a home loan because they think they have to get a conventional mortgage. Conventional loans are not guaranteed by the government. Thus, credit requirements are higher. But there are many government-backed options to consider if you have a low credit score.

You also do not need to have a 20% down payment to get a mortgage, despite what you hear. For example, the FHA loan program is one of the best options available for people with lower credit scores and down payments. The loan is backed by FHA. So, if you do not pay on the loan, FHA steps in and pays off most of the balance to the lender. This reduces their risk exposure and therefore they are willing to give you a loan.

A major benefit of the FHA program is you only need a 3.5% down payment. This is a huge plus for people who do not have a current property to draw equity from.

Another benefit is because the program is backed by FHA, you can get a rate that is possibly under market rates. In 2017, you could get an FHA loan at a rate below 4%. In 2018, rates are in the 4.5% range but still a bit under conventional rates.

For people with lower credit scores, a government backed loan such as FHA is the best option because the interest rate is not based upon your credit score, and the down payment is low.

The VA loan program is similar, but it is only for veterans and active military. Rates are lower than FHA, there is no mortgage insurance, and you can get 100% financing. This is the best option for veterans and active military with low credit scores.

USDA loans are a great option for people with low credit scores who are buying in areas that are designated as rural by USDA.

Understand Your Credit

You really need to understand why your credit is what it is when you are getting a home loan. Find a mortgage loan officer you can trust who can help to show you what your options are. For people with bad credit, a big, regular bank may not be the best fit. Credit unions and community banks often have mortgage loan professionals who can work with people with average or poor credit scores.

Reduce Debt

If you want to increase your credit score quickly, the best way is to pay down debt. While this is not always easy, it is sure to raise your score by 20 or more points quickly.