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04.16.20

Mortgage Options for People with Bad Credit

How Can I Get Approved for a Loan With Bad Credit?

When interest rates are low, it’s a great time to apply for a home loan. But for many borrowers, there’s an “if” involved in that statement.

When interest rates are low, it’s a great time to buy a home IF you have a good to great credit score.

So what’s a borrower with a bad credit score to do?

Are you out of luck? Will you miss the boat? Is there a way to take advantage of low rates even though you have a low credit score?

Yes, you have opportunities and options to act while interest rates are low. And keep in mind, a lower prime lending rate affects all loan types. So while you might not get the best terms, you are likely to get a better rate than you might get at another time. Moral of the story, when rates are good, it’s a good time for everyone to consider buying a home.

Are There Mortgage Loans for Bad Credit?

The federal government has multiple loan options, such as an FHA loan, VA loan or USDA loan available to homebuyers with low credit scores. Sometimes there are also local and state grants or programs available. A local, personal loan officer would be your best source for discovering what’s available in your area and how you might qualify.

Beyond seeking out other loan options, the best thing an aspiring homebuyer with a low credit score can do is to raise their credit score. Yes, raising your credit score is achievable and doesn’t take forever. In fact, many of the techniques can be accomplished in one day and won’t cost you a dime.

Odd as it sounds, the lower your credit score, the easier it is to improve it. In fact, when you begin with a low credit score, increasing it by 100 points isn’t an unrealistic expectation.

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FHA Loans for Bad Credit

When your credit score is low, your borrowing options are limited. But there is hope for your homebuying dream. For homebuyers with low credit scores, hope typically begins with the Federal Housing Administration.

FHA loans come with standards that are easier to meet than conventional loans. Most surprising, the interest rates can be lower than conventional loans. Why? Because the government wants to remove obstacles to homeownership. It’s good for you, it’s good for neighborhoods to have invested homeowners and frankly, it’s good for state and federal tax collection.

Of course, not everyone can qualify for an FHA loan. Don’t go in thinking you can have a history of repeated late payments or multiple loan delinquencies and qualify for an FHA loan. However, the requirements for an FHA loan are much more friendly and more forgiving of financial issues in the past.

VA Loans for Bad Credit

If you are a former member of the military, an active member of the military or the spouse of a deceased military member, you qualify for a VA loan. This puts you in a very strong homebuying position.

VA loans are a fantastic opportunity. For starters, there is no requirement for a down payment. A VA loan can also come with a decent interest rate, especially for a buyer with a low credit score.

You should know that there are fees associated with a VA Loan that you will not find with other loan programs, but ultimately a VA loan will be your most affordable option.

USDA Loans for Bad Credit

A USDA loan can be used to purchase a home in a designated rural area. The home does not need to be a farm, nor do you have to be a farmer or work in the agriculture industry. Really, the requirements tend to involve your credit score, your income, being a U.S. citizen, the condition of the home and where the home you hope to buy is located.

When you use a USDA loan, you are not required to make any down payment. You can if you want, and it’s smart to do, but it’s not required.

The Downside of Bad Credit Mortgage Loans

Hold on a second. Did you just read that an FHA loan can offer an interest rate that is LOWER than a conventional loan? Yes, yes you did.

Why would a lender provide lower-than-conventional-rate loans to people with low credit scores? Or better yet, why wouldn’t everyone try and apply for an FHA loan? Well, an FHA isn’t always a borrower’s best option, especially if they have a good credit score.

Among the requirements of an FHA loan is an Upfront Mortgage Insurance Premium. This is an amount equal to 1.75% of the FHA loan amount. So, for a $250,000 home, the Upfront Mortgage Insurance Premium is $4,375.

In addition to that fee, a monthly mortgage insurance premium must also be paid. This amount will depend on the loan amount. Depending on the mortgage terms, these premiums can sometimes be reduced, refunded or canceled. It’s also conceivable that a refinancing of the home loan could remove the monthly premiums. The best way to navigate these scenarios is with the help and guidance of a personal loan officer.

What Mortgage Lenders Will Work With Bad Credit?

Very little about home mortgages are obvious, clear or easy to understand for homebuyers — especially when you are beginning the journey with a low credit score. Even the idea of trying to find a lender who will work with you can seem intimidating. Don’t get overwhelmed. There are programs available and people willing to help you. Start by connecting with a local, personal loan officer. They can outline the steps you need to take, the options you should explore, find lenders willing to work with you and be by your side to identify all of the opportunities you have to own a home. With a personal loan officer on your side, you, too, will be able to capitalize on low-interest rates or an interest rate drop.

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