If you’re not sure how to apply for a home loan with bad credit, rest assured that your dreams don’t have to be ruined. Getting approved for a home loan with bad credit is feasible for most people, you just might have to add a few more steps to the application process. Here are six ways to get a home loan with bad credit:
1. Make a Larger Down Payment
The days of requiring a 20% minimum downpayment are mostly over, however, this may still apply if you have bad credit. In general, lenders use your credit score to determine what home loan programs you qualify for. Some may require higher down payment amounts than others.
If you’re trying to get a home loan with bad credit, offer to make a larger down payment, even if it’s not required. This will give lenders confidence in your willingness and ability to pay back the loan, and it will show them that you’re able to save large amounts of money to reach a goal. Keep in mind that your credit score must still fall within reasonable parameters and fit the guidelines of your chosen mortgage program. Your down payment doesn’t necessarily have to be the full 20 percent, but anything larger than the minimum amount required can have an impact. Sit down and talk to several lenders and ask them if this might help you get approved.
If you do decide that a bigger down payment will get your foot in the door, don’t forget to keep an additional emergency fund set aside. This fund can help you in a pinch later down the road in case something comes up and you have trouble making the mortgage or other payments.
2. Look Into an FHA Home Loan
When it comes to getting approved for a home loan with bad credit, FHA loans are a good option. This government-backed program requires a small down payment and generally accepts applicants with FICO scores of 600 or lower. FHA loans were created by the Federal Housing Administration back in 1934 to encourage more people to be homeowners during the Great Depression, but it’s still an active program today. The FHA program has been used by over 40 million families to buy a new home or to finance their current home. FHA loans are fully insured which encourages lenders to approve more people since there’s less risk. This type of mortgage makes up a large percentage of the market, which means your odds are pretty good at getting approved for a home loan.
As long as your credit score is 580 or higher, you should have no problem getting an FHA loan. You may need a higher down payment if your score is at 550 or so, but that largely depends on the lender you choose. If you don’t have the cash for a down payment, there are assistance programs available that can help.
Overall, an FHA loan is a good option to get you on the road to homeownership. It’s important to note that this loan program does not allow you to drop PMI after you reach 80% equity, so that’s something to keep in mind.
3. Consider a Local Bank or Credit Union
Big lenders tend to have stringent guidelines when it comes to approving mortgages. However, you may still be able to get a home loan with bad credit if you talk to a smaller local bank or credit union. Small banks and credit unions have less strict rules and parameters when it comes to issuing home loans. However, that doesn’t mean that your credit can be terrible and you can have low income and still be approved.
If you’re not sure where to begin, a community bank or credit union can be a good place to start. Ask them what their requirements are and set up a free consultation to talk to a loan officer before you apply. They can give some advice about what to do to clean up your credit in order to be approved.
Aside from these resources, you should also consider talking to a mortgage broker. A broker can shop rates and terms for you and determine which programs you might qualify for with a lower credit score.
There is no guarantee that your home loan will be approved, but these options put the odds more in your favor. Don’t be afraid to ask questions and find out what you can do on your end to move closer to buying a house with bad credit.
4. Be Patient & Fix Your Credit First
If you’re not in any hurry to buy a home, you may want to wait a while until your credit improves. The higher your score, the better the odds are that you won’t just be approved, but that you’ll also get more favorable mortgage terms. You can begin to fix your credit by stopping excess spending and by cutting up your credit cards or putting them away. Work on paying down your current debt while avoiding accruing any new debt if possible. Try the snowball method to pay your debts down and see fast results. This method of repayment involves paying down your lowest balance card first while making the minimum payments on the others. As you pay the smaller card down, you continue onto the next one, creating a “snowball” effect that will get you out of debt faster. Another way to improve your score is to transfer your high-interest balances to a low-interest card. The less you pay in interest each month, the faster you can pay down the principal and eliminate your total debt.
When you apply for a home loan, the lender looks at something called your debt to income ratio. If your total debt is lower, you’ll have more income to spend on a home and monthly mortgage costs. For those who can wait it out, consider trying to boost your credit score before you apply for a home loan. It may take some time, but the broader financial benefits can be worth the wait.
5. Explore Options for Veterans & Service Members
If you’re an active duty service member, a veteran, or a military spouse, you could qualify for a VA home loan, even if you’re hoping to get a home loan with bad credit. The VA offers affordable mortgages that often include no required down payment. You will need to provide a valid Certificate of Eligibility before you can apply to prove your service history or your spouse’s. The federal government guarantees a portion of VA loans, which means they have a lot of advantages for those buying a house with bad credit. Aside from minimum or no down payment, there’s also no requirement for PMI, which could save you thousands of dollars each year. VA loans also have much more flexible qualification guidelines, which means it’s easier to be approved for this type of loan whether your credit is perfect or not-so-hot.
Don’t forget, when you purchase a home, you’re also responsible for the closing costs. The good news is, VA loans have much lower closing costs than most other programs, making this type of loan even more appealing. There is also a one-time funding fee that can be financed into your loan, saving you even more.
6. Prove Your Worth
Mortgage lenders want to feel confident that you will not just qualify for a home loan, but that you’ll also be able to pay for it. When getting approved for a home loan with bad credit is an absolute necessity for you, you’ll need to prove that you’re worthy of the loan in other ways. One way you can “prove your worth” to a lender is to have a solid track record with the same employer. Ask if your boss or human resources can write you a letter of recommendation along with the standard verification of employment letter. If you’ve rented a place for a year or more and you’ve never been late, this can also work in your favor. Lenders want to see that you have been able to handle the cost of housing for a set amount of time before they’ll even consider you for a mortgage. Another way to show you’re capable of handling a mortgage is to show proof of a separate emergency fund. This demonstrates your ability to save money, even if your credit score is less than perfect.
Homeownership is Possible
Just because your credit might not be exceptional, it doesn’t mean that there aren’t ways to get a home loan with bad credit. Talk to a local credit union, broker, or small bank to find out what you might qualify for. Or, if you can afford to wait a while, focus on improving your credit to get the home you want.
If you need more advice about your personal finances, how to save money, and anything savings related, contact us today.