How to get a mortgage with terrible credit

Tips for getting a mortgage with bad credit

Are you interested in buying a home for the first time but don’t have the best credit? Anyone can end up in a bad financial situation. Whether it is because of their own mistakes or a situation beyond their control, it can lead to credit difficulties. Having a poor credit history will make it more difficult to approve a mortgage. It doesn’t matter if it’s a construction ready to build your own house or a traditional mortgage to buy a resale property.

While you may have a harder time convincing a lender that you are an acceptable risk, it is still possible to get a mortgage with bad credit. We show you what you can do to improve your ability to buy a home even with bad credit.

What is bad credit for a mortgage?

How To Get A Mortgage With Bad Credit?

A low credit rating or significant negative financial situation, such as buying a home that has been foreclosed, could be a problem for lenders. So if you have filed for bankruptcy or foreclosure, it will hurt your chances of getting a mortgage. Even if your credit score is good, you will have to wait a few years or more before you are considered eligible for a mortgage.

Lenders follow guidelines set by government agencies and government sponsored companies. These organizations have different FICO credit score requirements and wait times for major negative credit events.

Credit information is communicated to three major credit bureaus including Equifax, Experian and Transunion. These agencies provide information to lenders who will draft loans for those who buy homes.

Let’s take a look at the types of loans you can get when your credit score isn’t the best.

Get an FHA loan

To qualify for a Federal Housing Administration credit loan, you need a credit score of 500, which will require a 10 percent down payment. To qualify for a down payment that is 3.5% lower, you need a score of 580.

You have to wait one year after a Chapter 13 bankruptcy and two years for Chapter 7. There is a 3-year waiting period for foreclosures.

Get a USDA Guaranteed Mortgage

If you are low income, a USDA loan with a score of 640 or even as low as 581 under certain circumstances will allow you to buy a home. The wait time after an adverse credit event is similar to the FHA.

A USDA loan is only available in rural areas. Generally speaking, the population to get a USDA loan must be less than thirty thousand people.

A VA loan could be a great option

For active duty or military veterans, the VA offers a lot. They don’t have formal credit score requirements or minimum down payments, nor do they need to pay for mortgage insurance. Although there is no fixed score requirement, lenders generally require 620 for VA loans.

If you have bankruptcy on file, you must wait the same amount of time as with the FHA. Foreclosures only require a 2 year wait, however, the lowest on this list. However, they need you to be clear of tax liens and judgments.

To be eligible for a Veterans Loan, you must be in service or have served in the military. USDA and VA loans are two of the mortgages available with no down payment requirement.

Fannie Mae and Freddie Mac

Fannie Mae offers down payments as low as 3% if your score is 620 or more. They will demand that you pay for private mortgage insurance if you deposit less than 20 percent. This insurance protects them, but it costs you money, and the lower the down payment, the more you will have to pay. You will be able to get rid of the PMI as soon as you have twenty percent equity in the property.

Freddie Mac has mortgages for people with scores of 660. For both government sponsored organizations, you will have to wait at least two years after discharge from bankruptcy and seven years for foreclosure. If you have any tax liens or judgments against you, these will need to be fully paid before you are eligible.

Bad Credit Mortgage Interest Rates

If you have a bad credit history, you are going to be viewed as a higher risk by the banks. And with higher risk, banks will charge more interest on your loan. Even a fraction of a percent difference will mean you will be paying thousands of dollars more over the life of the mortgage.

Improving your credit score gives you a better chance of getting a lower interest rate from lenders.

Improve Your Chances Of Getting A Bad Credit Loan

There are things you can do to improve your chances of getting the mortgage you want, even if your credit is terrible.

Increase your deposit

If you can do it save more money for the down payment your chances of getting approved by a lender will increase. Although it may seem complicated, cutting your expenses and saving money in a bank account for the sole purpose of improving your situation. Additional work and regular payments to this account will be your down payment, showing the lender that you are less risky.

Many people don’t realize that they too can get a down payment gift from a parent. Unfortunately, lenders or real estate agents do not promote a down payment gift. It really should be mentioned as an option a lot more often.

Checking Your Credit Reports

If you haven’t checked your credit reports, you should. There may be items in the reports that are not correct and are affecting your score. The credit bureaus hold information about you, and if this is incorrect or out of date it could affect the way you view lenders. Get your credit report is easy and free once a year with the three reporting agencies.

If something is wrong with your report, you can address a dispute to the office. Once the issue is resolved, your score should improve.

Credit Counselors or Credit Karma Can Help

While you may not know what to do to improve your score, even after reading your credit reports, a counselor will. They can look at the details of your financial history to reverse the direction your score has taken. Another great option is to use Credit Karma. One of the most Beneficial Features of Credit Karma When Buying a Home is to show you exactly how to build your credit score.

They’ll actually show you exactly how your credit decisions will impact your score. For example, what would happen if you closed one of your credit card accounts? People do things all the time that unknowingly will have a negative impact on their credit situation. Credit Karma shows you what not to do!

Dealing with debt

If you have debt, the lender will look at the relationship between that debt and your income. They take the amount of debt, including the mortgage payment, and divide it by your monthly income.

If your debt-to-debt ratio is too high, paying off the debt before applying for a bad debt mortgage is the way to go. You can also increase your income to improve the ratio.

Your history of paying debts is also taken into account. If you frequently make late payments, it won’t help your situation. Get back on track with on-time payments for at least 3-4 months before trying to get a loan.

Co-signers could be an option

A co-signer on your loan could help you get a mortgage if they have a better credit rating. However, it is a significant risk for them. If you miss payments, their credit score will be damaged and they will be ultimately responsible for the loan. Parents will often co-sign a child’s mortgage.

Final thoughts on getting a mortgage with bad credit

While it is more difficult to find a mortgage lender to help you when you have terrible credit, it is far from impossible. The worse your credit situation, the higher the interest charges you can expect.

If you can take steps to improve your situation, a mortgage application will have a better chance of being approved and you can also lower your monthly payments.

Hope you have found this information on getting a mortgage with bad credit helpful.

Other resources from Terrific Realty Biz News

Get even more valuable information when you buy a home and get financing from Realty Biz News.

  • What are smart real estate investments – Do you know some of the best things you can invest in when it comes to real estate right now? Find out in this great resource via Paul Sian at Realty Biz News.
  • Why refinance your mortgage – see all the top reasons why refinancing your current mortgage might make sense. Refinancing can save you tons of money and potentially shorten your mortgage term.
  • Mortgage myths not to believe – Learn about the most common things about mortgages that are just not true. These are the most common mortgage myths that should be avoided.

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