How to Get a Home Loan with Bad Credit Scores?
If you have made some financial mistakes in the past, you may think that buying a home is beyond your means. But you should not despair. Over the last five years or so, mortgage lenders have eased up some of their standards that they tightened after the mortgage meltdown. This means that people with average or poor credit still may get a home loan. The question is, how much will you have to put down and what is the interest rate you will pay? If you want a home loan for bad credit keep these easy tips in mind:
#1 Try FHA
Conventional home loans can be harder to obtain for credit challenged borrowers because they are too high of a risk. If you do get approved, you may have to make a 10% or 20% down payment, which is out of reach for many Americans with financial difficulties. However, the Federal Housing Administration (FHA) can be a real lifesaver for the home buyer with bad credit. FHA does not do loans itself; rather, it guarantees the loan with the full faith and credit of the US government. It will pay off the lender in the event that you default on your mortgage.
In the eyes of most lenders, this guarantee greatly reduces risk for lending to a bad credit borrower, which increases the chances that your mortgage will be approved. Generally, you will need to have a credit score of at least 620 to be approved for a 3.5% down payment FHA mortgage for home buying. You can be approved with a credit score as low as 550, but you need a 10% down payment. Remember this, the FHA has been writing the book on "how to get a home loan with bad credit" for over 80-years. Note: If you have a chapter 7 bankruptcy or foreclosure on your record, you may need to wait two or three years to get an FHA house loan.
#2 Make It a Short-Term Loan
Getting a bad credit mortgage loan is ok; owning a home is usually a better deal than renting. However, having poor credit means you will pay 1-2% higher for your loan, which adds up to tens of thousands of dollars of additional interest over the loan's life. So, you should improve your credit as soon as you can and refinance the mortgage into a low interest loan as soon as your credit scores rise. So, be certain to get your financial affairs in order. Check your credit score, pay off debt and be sure all bills are paid on time. Make sure if you get a bad credit mortgage loan that you verify there is no penalty for early pay-off.
#3 Get an ARM
An adjustable rate mortgage may be for you if you have bad credit. A 30 year fixed rate mortgage may be hundreds of dollars higher with bad credit. A five-year ARM with a lower interest rate could be just what you need. When you have a higher credit score and lower debt, consider refinancing into a fixed rate mortgage. Of course, the risk of an ARM is that it could rise in interest at the end of the term. This should give you the motivation you need: Get your credit scores up, pay off debt and be financially disciplined!
#4 Increase Your Credit Score
If you have bad credit, you can greatly reduce your interest rate by increasing your score. This can take few months or a year, but an increase of score by a few points can make a difference; did you know that with a 640-credit score, virtually all FHA approved lenders will work with you? This drops to 50% if your credit score is 639 or lower.
Pay down your credit card debts and make all payments on time. Also, check your credit report and see if anything is inaccurate. Inaccurate negative marks are common on credit reports. You may file a dispute with each credit agency to get those bad marks removed. There are still a few brokers and lenders that offer a no credit check mortgage proposal, so ask around when you are shopping companies.
#5 Find a Co-Signer
For a person with bad credit, getting a co-signer on a mortgage loan is an option. This can help you to avoid a high interest rate completely. However, your family member or friend is at risk. If you do not pay the loan, he or she is liable. This is a very good way to ruin family and friend relationships, so if you go this route, be absolutely positive that you will pay the loan on time.
#6 Put More Money Down
You can get a lower interest rate if you can put 5% or 10% down on the loan. This shows you have skin in the game, which makes you less likely to default on the mortgage. Consider a non-prime solution with private money financing from hard money lenders now.
The Bottom Line
The most effective way to get a home loan after you have had some bumps on your credit is to simply start paying your bills on time, pay down debt and get your scores up. This will get you the best mortgage rate. However, if you need to get a loan with bad credit now, trying the above strategies can get you on the path of homeownership.