Mortgage loan with bad credit? Tips and tricks

Buying a house can be daunting, especially if you have bad credit. However, there is a financial solution available known as a “bad credit home loan“. Your credit rating may not be as big of an obstacle as you may have believed.

Here we will explore the options available for individuals looking to get a mortgage loan with bad credit and discuss the eligibility criteria for obtaining a mortgage.

Can You Buy A House With Bad Credit?

Regarding the specific numerical value, a FICO® Score below 670 is classified as “subprime,” as indicated by Experian™, one of the three primary credit reporting agencies. Experian™ further categorizes subprime scores into two groups: a score falling within the range of 580 to 669 is considered “fair,” whereas anything below 579 is categorized as “poor.”

Having cash at your disposal becomes a valuable ally in the context of bad credit. The greater your cash reserve for a down payment, the more advantageous your position becomes. This is primarily because your credit score might limit your eligibility for a specific mortgage loan amount. By being able to bridge this gap with cash, you can still make your desired home purchase within reach.

Also, the lender you ultimately choose will also impact the equation, as each lender sets its distinct criteria. While it is feasible to secure a loan with bad credit, be prepared for the prospect of higher interest rates, which, in turn, could lead to increased monthly mortgage payments.

When buying a home with bad credit, you can improve your credit score and refinance your mortgage for better loan terms.

mortgage loan with bad credit

How To Get a Mortgage Loan With Bad Credit?

For those with bad credit looking to buy a house, here are some loan options.

Conventional Loans

Fannie Mae and Freddie Mac require a minimum credit score of 620, though some lenders have higher thresholds.

FHA Loans

FHA loans, backed by the Federal Housing Administration, are especially appealing for first-time homebuyers due to their lenient qualifying criteria. To secure an FHA loan through most lenders, you’ll typically need a minimum credit score of 580. Some lenders do offer FHA loans with a minimum score of 500, but these require a 10% down payment. Additionally, FHA loans come with specific eligibility requirements, such as being applicable only for the purchase of a primary residence.

VA Loans

If you are a veteran, the surviving spouse of a veteran, or actively serving in the armed forces, you may qualify for a VA loan. These loans are supported by the Department of Veterans Affairs and offer the advantage of purchasing a home with no down payment, although a one-time “funding fee” is usually involved. While the VA does not specify a credit score minimum, most lenders do. Like FHA loans, specific property standards must be met for eligibility.

USDA Loans

USDA loans, backed by the U.S. Department of Agriculture, provide an opportunity to purchase a home in qualifying rural areas with a zero-down payment. To qualify for the loan, most lenders expect a credit score 640, in addition to other income requirements particular to USDA loans.

5 options for buyers who can't get a bad credit mortgage

1. Expand your credit limit

As you gain better control over your financial situation and begin the process of enhancing your credit score, boosting your available credit can expedite the improvement. This can be achieved either by reducing outstanding balances or formally requesting an increase in your credit limit. This initiative contributes to elevating your credit score because it lowers your credit utilization rate, a significant factor in the determination of your creditworthiness. It’s crucial to keep in mind that having a higher credit score is advantageous when it comes to home-buying and mortgage applications.

Furthermore, it’s worth noting that most credit card companies permit you to request multiple credit limit increases without triggering a hard inquiry on your credit report.

2. Add multiple accounts at once

Incorporating new accounts into your credit profile not only expands your available credit but also enhances the diversity of your overall credit mix. When done collectively, this approach offers distinct advantages as it synchronizes all activities within the same timeframe. Consequently, all credit inquiries will have their removal date aligned, new accounts will mature simultaneously, and your overall available credit will increase.

Furthermore, this adjustment provides an opportunity to establish a more robust payment history on your credit report. Typically, you can expect to observe the positive effects of adding multiple new accounts to your report in less than 30 to 45 days.

3. Pay to have negative items removed from your credit report

Collections signal to lenders that you owe money to a creditor and haven’t taken steps to settle the debt.

Even if you decide to clear the collection by paying it off, it might still linger on your report, labeled as “Paid,” which is an improvement compared to an outstanding collection. However, the most advantageous outcome, which can significantly enhance your credit profile, is to request the removal of these items from your credit report, especially if you’ve made a late payment.

Before proceeding with payment-for-deletion negotiations, it’s crucial to obtain written confirmation of the agreement. This approach effectively erases the collection entry from your report, akin to it never existing in the first place.

4. It's important to avoid hard credit inquiries

Obtaining an insurance quote won’t have any impact on your credit score, but when it comes to seeking new credit, it’s a different story. Accumulating too many hard inquiries on your credit report can have adverse consequences.

For any financial endeavor necessitating a credit check, it’s prudent to confirm whether it’s a hard or soft inquiry. It’s advisable to steer clear of activities that result in a hard inquiry shortly before you submit a mortgage application.

5. Find A Co-Signer

Depending on the terms of your mortgage, it might be possible for you to meet the requirements for a home loan by having someone co-sign with you. This addition can be beneficial in pushing your credit qualifications beyond the required threshold because the co-signer’s income and assets are considered alongside your own. Having a co-signer could also make it possible for you to secure a larger loan, even if your credit isn’t excellent, giving you more financial flexibility when you’re in the market for a home.

It’s essential to be aware that when it comes to determining your interest rate and the cost of mortgage insurance, the lowest median score is still the one used, potentially leading to a slightly higher interest rate for your loan. Furthermore, the practice of averaging credit scores is not applicable to all types of loans.

It is possible to obtain a home loan even if you have bad credit

A bad credit history doesn’t necessarily preclude you from reaping the advantages of owning a home. Rather, it might call for a more thorough exploration when seeking out financial support. When considering a government-backed loan, such as an FHA loan, it becomes possible to secure a mortgage even with a credit score as low as 500. While the urge to purchase a home swiftly may be strong, it’s wiser to invest some time in evaluating the various choices and interest rates at your disposal.

Ready to leap into home ownership? We’re here to help! Start your mortgage application today and we’ll guide you through the process. 

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