How to get a home loan for bad credit score

If you have a low credit score, you might lose hope and forget your dream of homeownership—but that is the wrong outlook. There are financial strategies and mortgage loans out there that could help you realize your homeownership goals even if you have bad credit. You can still buy property even when your credit score lags behind what is expected for usual home buyers.

In this article, Mortgage Professional America will cover what you need to know to secure home loans for bad credit scores. We will help you learn about what mortgage lenders consider as bad credit scores so you can check what category you fall into. We will also go over the types of mortgages you can apply for even with poor credit scores. Want to know the easiest home loan to get approved for with bad credit? Read on for more.

This guide to home loans for bad credit is another one of our client education pieces. So, to our normal audience of mortgage professionals, you can share this with your clients who have poor credit scores. This article can help them understand that having bad credit does not immediately correspond to an impossibility of securing a home loan.

Is it possible to secure a home loan with bad credit?

The simple answer is yes. You can still buy a home even if you have poor credit scores. There are numerous mortgage lenders that can still lend to borrowers even when they consider these clients as high risk. It can come with higher mortgage rates but still, you can apply for a mortgage even if you have bad credit standing.

What are considered bad credit scores?

Credit scores, which are calculated by a variety of credit scoring models, typically fall into the following categories:

• Excellent: 800 to 850
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

If you have good credit standing, you will enjoy more affordable mortgage rates compared to those with poor credit scores. If your credit score is below 580, you will face difficulties in applying for mortgages. Still, there are available home loans for bad credit scores to choose from.

What is the lowest credit score to get a mortgage?

To qualify for a mortgage, the minimum credit score required differs by the type of home loan as well as the mortgage lender. It is not impossible to get a mortgage with a fair to poor credit classification. However, you will likely find fewer options and higher mortgage interest rates. That limitation exists for anyone with a credit score under 700.

Do you know that you can purchase a home even without a credit score? Don’t believe us? Watch this video:

Bad credit standing can make your case more complicated as opposed to the usual mortgage applicant. Get the right advice and support from one of the mortgage experts on our Best in Mortgage page.

How do you qualify for a home loan with poor credit?

Your mortgage options may be limited if you have a lower credit score, which usually weakens your mortgage application. But again, it is possible to qualify for a home loan with bad credit. You can still strengthen other aspects of your loan application to improve your chances of receiving approval with bad credit.

There are four things to improve if you want to secure a home loan even with a bad credit score:

1. your DTI
2. your down payment
3. your cash flow
4. less expensive choices for properties

Let us discuss each area of improvement:

1. Your DTI

Your DTI, or debt-to-income ratio, will be reviewed by commercial banks and mortgage lenders to ensure that you can afford your mortgage repayments. Your financial situation will be more attractive to home loan providers if you are able to pay off some of your debts, or earn a raise, prior to applying.

2. Your down payment

Since you are putting more of your own money on the line, placing a larger down payment will make your loan application stronger. This is a better move than paying the average down payment on a house.

3. Your cash flow

Your application will appear less risky to underwriters if you can show your lender consistent income for two years or more, either through tax returns or W-2 forms.

4. Less expensive choices for properties

Your odds of receiving approval for a home loan will be better if you find a property that you can easily afford. This is in contrast with a house that stretches your funds each month. But don’t worry—you can upgrade after you have built some equity and strengthened your credit profile.

Learn how to calculate your home equity in this article.

Disadvantage of having bad credit when applying for a home loan

The obvious downside is that getting a home loan with poor credit will likely cost you more money. This is because mortgage interest rates rise as your credit score drops. In fact, throughout the life of your property loan, even a seemingly negligible gap in your mortgage interest rate will cost you upwards of tens of thousands of dollars.

For instance, anyone with a credit score between 760 and 850 will have to deal with the average annual percentage rate (APR) of 7.11% for a 30-year fixed mortgage loan. For anyone with a credit score of 700 to 759, they need to prepare for an APR that sits at 7.36%. In these two categories for credit scores, a significant difference is already made. These two are considered excellent to good credit scores.

Watch this video to learn how your credit scores can affect the mortgage interest rates:

Get updates about the current mortgage rates in the United States when you check out this guide. Be sure to bookmark this page or check back for updates. Scroll down the page for the latest figures per state.

Improving your credit scores

Currently, the median sales price in the country is $404,500. This means that for a 30-year fixed-rate loan, you will have to pay the usual 20% down payment (which is $80,900 in this scenario). This is in addition to more than 7% in interest over the life of the home loan. Plus, this case is for those with usual credit scores needed for mortgage applications.

On the other hand, you would pay a lot more than this if you had a lower credit score. Home buyers with bad credit scores tend to face higher mortgage rates.

While it is possible to buy a home with poor credit, it would help to improve your credit score before getting a mortgage. Doing so could save you tens of thousands of dollars in mortgage interest during the life of your mortgage.

Types of home loans you can get even with bad credit standing

If you haven’t improved your credit score yet, there are available types of home loans for bad credit in the country. Some banks and lending institutions can offer property loans designed specifically for people with low to moderate income levels.

Here are two home loan option types available to property buyers with bad credit:

1. government-backed home loans
2. special home buyer programs

Let us take a closer look at these two home loans for bad credit:

1. Government-backed home loans

Government-backed home loans are widely available for borrowers with poor credit. These types of home loans are typically underwritten and given by approved mortgage lenders but are still government guaranteed. Since these mortgages are not as risky for lenders, they have lower credit score requirements.

2. Special home buyer programs

Some of the more popular home buyer programs include the Neighborhood Assistance Corporation of America (NACA) and Habitat for Humanity. There are also smaller local, regional, and state-level programs that will help qualified first-time home buyers or anyone who has fallen within specific income limits.

While special home buyer programs usually offer down payment or closing cost assistance, they can also cater to borrowers with poor credit scores.

For more information about how to get a home loan with bad credit, watch this clip:

What is the easiest home loan to get approved for with bad credit?

Aside from the two above, the easiest home loan to get approved for with bad credit is an FHA loan. This type of home loan has mortgage insurance from the Federal Housing Administration (FHA). As such, property loan providers have an added security even when they consider a mortgage applicant as high risk due to having bad credit standing.

Know more about FHA loan and its requirements when you go over this guide.

Securing home loans for bad credit score

Despite having a bad credit score, you can now be sure that it is still possible to achieve your homeownership dreams. With strategies to improve other factors aside from your credit score, you can secure a specific mortgage targeted for clients with similar concerns.

Getting home loans for bad credit can be more difficult if you do it on your own. You need to have an experienced mortgage broker to help you navigate the processes. With the guidance of an expert, plus some focus and determination, getting your dream home will become a reality.

Do you find this guide on how to secure a home loan for bad credit scores helpful? Share your insights in the comments section below.