How to Get a Home Loan on Bad Credit? Some Options and Tips!

How to Get a Home Loan on Bad Credit? Some Options and Tips!

Looking for bad credit home loans? Getting approval on a home loan can be challenging especially if you have a low credit rating. Your FICO score and credit history are some of the first things that mortgage lenders will check when reviewing your loan application and eligibility. Having bad credit certainly creates a bad impression. Also, ever since the housing market crash of 2008, subprime home loans have become rare if not non-existent. That does not mean you cannot obtain a home loan with bad credit. The Federal Housing Administration or FHA allows borrowers with 500 or higher credit scores to qualify for their loans.

FHA Bad Credit Home Loans for People with Low Credit Ratings

Traditionally, you need a credit score of at least 620-640 to get approval on a mortgage application. Therefore, even people with low credit scores could get a mortgage. Then the Federal Housing Administration introduced the FHA mortgage in 1934 in an effort to encourage more American people to own houses. Insuring mortgage loans also became a common practice and it significantly reduced the lenders’ risks. Qualifying for an FHA mortgage is much easier than getting approval on a conventional mortgage. Because of its lenient eligibility requirements, most low credit borrowers prefer FHA mortgage over other options.

When applying, you can either go for a 15 or 30-year fixed-rate mortgage or an adjustable rate mortgage. If you are looking for bad credit loans, the FHA mortgage is possibly the best option you will find.

Credit requirements for an FHA mortgage

Since FHA mortgages are insured, lenders have fewer risks to worry about. That is also the reason why borrowers with poor credit ratings have a high chance of qualifying for this loan. You no longer need to have a 620 credit score. Even lower scores can apply and get approved for these bad credit home loans. The lowest rating allowed for FHA loans is 500. Borrowers with 500 credit rating need to pay 10% down payment, whereas borrowers with a 580 rating must pay a down payment of 3.5%.

The FHA loans have become fairly popular with first-time home buyers. The low down payment and lenient credit requirements make it easier for borrowers to qualify for an FHA loan than any traditional loan. FHA also allows down payment via gift funds. A friend, family or loved one can gift 100% of your down payment. Also, if you manage to qualify for a good homebuyer program, you might get your first home loan without putting any down payment at all.

You may also find a down payment assistance programs and first-time homebuyer grants on the official HUD website. You can visit the local county’s website to see whether such programs are available for you.

Down payment Grants and Assistance for Bad Credit Home Loans

You need to visit the HUD website when looking for Federal Grants and down payment assistance programs. You may also come across some good local state programs in your search. There may also be available programs listed on your county’s or city’s website. Here are a few of the other attractive options when it comes to bad credit home loans.

VA home loans:

Veterans may be able to qualify for VA home loans. These loans come with perks such as no mortgage insurance and no down payment. There is no minimum credit score requirement for VA home loans. However, borrowers with credit scores of 620 or more typically get approved for these loans. In some cases, certain VA lenders may also approve loan applications of borrowers with a credit rating of 580.

USDA Rural Development Loans:

The USDA home loan program was introduced by the United States Department of Agriculture. The idea was to encourage ownership of homes in the rural areas of the nation. These bad credit home loans are specifically aimed at rural people who have low to moderate income. However, just because it says “rural,” do not start imagining farmlands and open roads exclusively. More than 90% of the US falls under the USDA eligible location. You can check out the USDA map for a better idea.

Just like VA mortgages, the USDA bad credit home loans are also 100% financing home loan. Since there are no down payments, the USDA loans have slightly higher credit requirements and eligibility criteria than the FHA mortgage. Most lenders will need you to have a credit rating of 640 to approve you for a USDA home loan. Because of the no down payment rule, these loans are also slightly riskier for the lenders.

Home Improvement Loans:

If you are thinking of getting a house that needs major renovations or quick repairs, you might go for the FHA 203(K) home loan. This loan will not only provide you with the funds for buying the house, but it will also give you additional funds to carry out repairs or renovations. You will find that FHA 2039(k) loans come in two forms – standard and streamlined. If you are planning for more basic and aesthetic repairs, you should go for the streamlined version as it is easier and quicker. The standard loan, on the other hand, is more appropriate for major renovation work involving things like foundation or plumbing.

How to Compensate for your Bad Credit?

If you have poor credit ratings, you may have to present some factors that will compensate for the lack of an impressive credit history. The process will require you to show how financial hardships caused you to fall behind on bill payments and also that you are now recovering and re-establishing your financial health and credit. Typically, if you have a low credit rating, your loan application will undergo manual underwriting. Make sure you get a loan with no hard credit check. There are other compensating factors that reduce the lender’s risks and improve your chances of getting approval:

  • Low debt-to-income ratio
  • Hefty down payment of at least 10% or higher
  • High income
  • Impressive cash reserves
  • No outstanding debts
  • No payment shocks
  • Significant time spent on the current job

Having a bad credit rating does not have to stop you from owning a house. If you are facing problems in getting a traditional home loan, there are bad credit home loan options you can explore. Do your research and see which one fits your bill.