Getting a Home Loan with Bad Credit
Getting a home loan with bad credit may sound impossible, but it really can be done with proper planning and patience. Plus, you can’t expect to get the best rates with a home loan with bad credit, so be prepared for that fact.
What constitutes Bad Credit?
These days if your FICO credit score is below 640, then you will find it harder to qualify for a home loan using most of the customary mortgage loans. However, there is a special FHA loan that is available for clients with bad credit to help them get a home loan with bad credit. Even with the FHA option, they have raised the score they accept from 620 to 640.
Generally, a credit score of 740 or better is considered excellent, a score of 685 to 739 is above average, 640 to 684 is considered good, and below that is bad or subprime.
These are, however, general and some lenders use a slightly different model and you will actually have to apply at a particular lender in order to know what scores they will accept for approval on a home loan with bad credit.
Changes in Lending Trends
Over the past two or three years, what used to be considered good credit has changed dramatically. Since the housing crash started in 2008, most lenders have raised their standards, so it is much harder to get a home loan with bad credit. Then, lenders looked more at your income levels for approval, but that isn’t the only thing they look at these days.
In the past, many lenders made subprime loand to give loan receipients more chances to get a home loan with bad credit, but this backfired in a lot of cases and caused many people to end up in foreclouse because they couldn’t afford the terms of the loan after all. Some have even gone out of business because of bad loans, such as Ameriquest company.
Today, lenders are much more concerned about credit scores, debt-to income levels, and the amount of money you have towards the closing feses. The FICO score is the final straw that may cause you not to get a loan unless you can find a lender who will still give you a home loan with bad credit.
How FICA Score Relates To A Home Loan With Bad Credit
A FICA score tells lenders how likely you are to replay your debt. There is also a new score called a Vantage Score that has been created by the credit reporting agencies. These days the mortgage companies don’t want any more problems, so are less and less likely to give someone with a low score a home loan with bad credit.
What is an FHA Home Loan With Bad Credit Option?
An FHA loan is a loan that is guaranteed by the federal government via the Federal Housing Administration. These loans are done by regular lenders, but they are protected somewhat if the mortgage is defaulted upon and the FHA will cover the lender’s losses.
If you do have a score that is low, you will also have to get PMI coverage if you can’t make a down payment of at least 20 percent.
An FHA home loan with bad credit option will let a home buyer have a credit score of clear down to 500, depending on their other financial circumstances. These candidates for a home loan with bad credit will, however, have to come up with at least a 3.5 percent down payment on the house they are trying to buy.
This FHA program for a home loan with bad credit isn’t a guarantee of a loan for customers fitting that description, but it can at least help some of them get the dream of owning a home that end up qualifying for this type of home loan with bad credit.
Other Loan Options
Other avenues for potential home buyers who have bad credit may include credit unions, peer-to-peer financing, or using a co-signer that has good credit.
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