How to Qualify for a Home Loan With Bad Credit

Bad credit doesn’t ruin your life. In fact, a preoccupation with credit scores can lead to higher amounts of anxiety that actually lead to financial mistakes. 

Avoid getting caught up in the idea that you need perfect credit in order to buy a house. Knowing how to qualify for a home loan with bad credit can help you achieve your dream of homeownership.

Check out this guide to buying your first property with a poor to average credit score.

The Time is Nigh

Before you get into the nitty-gritty of locking down your first property, think of why you’re buying a home. This can help you plan out your financing.

Did you just get a great promotion and relocate to a new state? Have a new baby on the way? Just know this article will help you narrow down your needs. 

There are many things to consider during the house hunting process that impact how you go about looking for a loan. Consider how much time you have to shop around for a lender.

The more time you have, the better. Most brokers will immediately direct you to federal mortgage programs that are designed to help low income borrowers afford a house.

But what if you don’t fall into the category of ‘low income’? Consider other mortgage programs that give you the financial flexibility you need.

A conventional mortgage loan offers fewer restrictions than a federal mortgage loan but with the same outcome. Consider the pros and cons of federal vs. traditional loans before allowing yourself to be shamed into the first lender who wants you as a customer.

Plan an Exit Strategy

Let’s be clear. As a borrower with bad credit, you are not the prettiest girl at the prom. 

Lenders won’t be beating down your door trying to ask you out. Get ready to hunt when searching for a mortgage loan with bad credit.

It needs to be an unemotional process in order to really work. You’ll need an exit strategy in place, for one.

The mortgage loan you start with shouldn’t be the mortgage loan you’ll end with. Your exit strategy should detail a plan to refinance or sell for a profit within a relatively short amount of time.

People with bad credit are going to get the worst interest rates and terms. Accepting this truth helps you figure out how to get yourself out of this mess at your first opportunity.

Take the house, take the best possible deal, but know that you’ll need to escape soon to avoid throwing money away in high monthly payments. 

How to Qualify for a Home Loan With Bad Credit

The first thing you need to do when learning how to qualify for a home loan with bad credit is pull your credit report. You might expect certain items to be there but you’d be surprised how often mistakes are included in a credit report.

Even if it’s only one item you get removed, that can mean a generous boost to your credit score. Credit history gets updated every 30 days so it’s not a fast turnaround.

Make sure you start this process early so you don’t miss the perks of improving your score. After you’ve settled your credit report, it’s time to search for a lender.

Be upfront with realtors and mortgage brokers about your situation. Chances are, they have resources waiting in the wings for borrowers with questionable credit.

Here are a few of the top loan programs for bad credit.

FHA

One of the most popular loan programs for borrowers with bad credit is an FHA loan. It’s backed by the Federal Housing Administration.

You must be a first time home buyer in order to qualify for this program. Borrowers who haven’t purchased a home in 3 years are also able to apply for FHA loans. 

You’ll need to have at least a 580 credit score in order to qualify for this loan program and maintain it throughout the underwriting process. FHA programs have accepted borrowers with lower scores, but higher down payments are usually requested. 

Again, if you’re issue isn’t income, you might opt for the higher down payment to offset terrible credit. There are other stipulations on an FHA loan to prevent people from flipping homes with federal funds.

For example, you have to agree to live in the home as your primary residence for a certain amount of time. 

 

VA

Military veterans, and active members of military, can apply for VA loans.  They’re backed by the Department of Veterans Affairs. These loans allow members of the armed forces to buy homes with no money down.

Spouses are also eligible to apply with certain restrictions. You need average credit to qualify for this program. If your credit is around 620, you might be a good fit for this program. 

USDA

Borrowers looking for homes in rural areas might qualify for a USDA backed mortgage loan. These loans were created by the U.S. Department of Agriculture to stimulate the economy in rural environments. 

You do need a 640 credit score in order to qualify for this loan which is on the high side for average credit. 

How to Get Approved for a Mortgage

 

If you’re concerned about how to qualify for a home loan with bad credit, rest easy. There are a variety of traditional loans available from private lenders.

You won’t get the best interest rates or terms, but you’ll have access to homeownership and the ability to refinance down the road. For more information and tips, visit our blog for udpates.  

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