Bad Credit Home Loan with Credit Scores As Low As 500

FHA (Federal Housing Administration) loans allow borrowers to have just a 500 credit score or higher to qualify. In this article you will learn about bad credit home loan programs and how to get approved despite having imperfect credit.

FHA loans allow for poor credit scores as low as 500 with 10% down and 580 score with 3.5% down.  

An FHA loan is a mortgage that’s insured by the Federal Housing Administration (FHA). They are popular especially among first time home buyers because they allow down payments of 3.5% for credit scores of 580+. However, borrowers must pay mortgage insurance premiums, which protects the lender if a borrower defaults.

Compensating Factors for Bad Credit If you have a poor credit rating then you will need to show some compensating factors that help make up for it. You will also need to show a financial hardship was the reason you fell behind on your monthly bills and you have since recovered and have re-established credit. 

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Usually if you have poor credit your loan will go through manual underwriting. These compensating factors reduce the risk to the lender and increase your odds of getting approved with a poor credit history.  Compensating Factors Large downpayment (10% down or more) Low debt-to-income ratio High income No outstanding debt Large amount of cash reserves Significant amount of time with current employer Paying comparable rent payments – No payment shock How much house can you afford? Use our calculator

Compensating Factors
Large downpayment(10 down or more)
Low debt-to-income ration
High Income
No outstanding debt
Large amount of cash reserves
Significant amount of time with current employer
Paying comparable rent payments -No payment shock

First Time Homebuyer with Poor Credit

FHA loans have become a very popular mortgage for first time homebuyers because of their low credit and down payment requirements.  This also makes them easier to qualify for than a conventional loan.

FHA loans also allow gift funds for the down payment.  100% of the down payment can be a gift from a friend or family member.  first time buyers may be able to buy a home with no down payment if you qualify for any homebuyer program.

There are various first time homebuyer grants and down payment assistant programs on the HUD website.

Contact Cambridgehomeloan.com for additional information HERE>

Mortgage lenders look for compensating factors with low credit scores. They can help decrease the risk. A few good examples include:
  • Higher down payment: Each loan program has a minimum down payment. You can put down more, though. A higher down payment means you have more “skin in the game.” In other words, you have more invested. Lenders believe this helps lower your risk of default.
  • Reserves on hand: This is money you have set aside in a liquid account. It shows lenders you can pay your mortgage even if your income suddenly stopped. They measure reserves by the number of mortgage payments it covers. For example, a $5,000 savings account would cover 5 months of a $1,000 mortgage.
  • Low debt ratio: Loan programs also have maximum debt ratio allowances. If your ratio is well below the maximum, it can work in your favor. It shows lenders you make smart financial choices.
Compensating factors are helpful when your credit score is mediocre. The positive factors show lenders you are a “good” risk despite your lower credit score. Lenders also look to see that you are actively working on improving your credit score. Work to pay your debts on time, and pay down your credit cards. This shows that you are responsible.

First-time homebuyers already have a disadvantage – they’ve never owned a home before. Lenders don’t know if you can handle large housing payments. No housing history along with bad credit doesn’t sit well with lenders.

What can first-time homebuyers do? Here are a few options:

  • Save money. As we discussed above, the higher your down payment, the lower your risk. Many first-time homebuyer programs offer little or no down payment. If you have bad credit, though, you already pose a risk. Instead, offer a higher down payment. Aim for 10% or more. This shows financial responsibility despite your credit score.

    A higher down payment may also qualify you for a lower interest rate, depending on your lender and the type of loan you apply for.

  • Get a co-signer. A co-signer may boost your purchase power. Co-signing doesn’t mean living in the home. A co-signer can be a “non-occupant co-borrower.” Government and conventional programs allow a co-signer. Most programs don’t put the non-occupant borrower on the title.

  • Establish a positive rent history. You can demonstrate a positive housing history without a mortgage. If you moved out on your own and pay rent, this may count. Lenders often verify the last 12-24 months of your housing history. They’ll ask for a Verification of Rent from your landlord. They may also ask for canceled rent checks for the last 12 months. This helps them verify your timely housing payments.

Let’s say you have both bad credit and no down payment to offer. What lender would ever approve this type of situation?

It seems risky but lenders do have loans that cover this type of borrower – with some help from the government. The FHA, VA, and USDA each have a loan program. These agencies don’t fund the loans. Instead, they guarantee them. Agencies pay lenders back for defaulted loans. The appropriate agency then takes possession of the home.

The three government-backed options are as follows:

  • USDA: The USDA loan offers 100% financing for rural properties. This doesn’t mean out in the middle of nowhere. The USDA sets the boundaries, many of which are right outside the city limits. Borrowers with little income do well with this loan. You can make too much money and not qualify. View the income guidelines for your area to see if you may qualify.

  • VA: Veterans of the military can obtain 100% financing with flexible credit guidelines. There aren’t any property location restrictions. You must prove you served enough time and can afford the housing payment. You can borrow as much as your area’s loan limit.

  • FHA (with a gift): FHA loans require a 3.5% down payment. 100% of the down payment can be a gift, though. Relatives, employers, and non-profit organizations may gift you the money. You can then utilize the flexible underwriting guidelines of the FHA program.

There are even more options if you have down payment funds. We discuss them below.

    • The Baltimore Community Development Grantgives $5,000 to first-time homebuyers. Single parents can use the funds for the down payment or closing costs. Your income may not exceed 80% of the median income for the area.

    • First Home Illinois is a mortgage and down payment assistance program. You may receive up to a $7,500 grant along with a 30-year fixed mortgage. The program is for first-time homebuyers. But, if you haven’t owned a home in 3 years, you qualify as such. The most you must contribute equals the greater of 1% of the purchase price or $1,000.

    • Habitat for Humanity homes are available throughout the United States. Their mission is to provide safe housing for those unable to afford it. The homes offered vary by community and need. Single parents who qualify may exchange sweat equity for a home. Single parents don’t have to build the home. They can help the community in other ways. In addition, most homes require an affordable mortgage. The funds help Habitat for Humanity stay operable.

  • Teachers: Several programs exist to help teachers become homeowners. Many teachers don’t live within the community they teach because of the cost. These programs help with grants and affordable financing options.
    • Good Neighbors Next Door: This program helps leaders in the community. Teachers, along with firefighters and police, qualify. Qualified professionals can purchase a HUD home for 50% of the asking price. These HUD homes are located in an area with high foreclosure rates. As a part of the deal, teachers must live in the home for 3 years.

    • Extra Credit Teacher Home Purchase Program: Teachers in California can take advantage of this CalHFA program. Only first-time homebuyers qualify. Borrowers must currently work in a California school. They also must purchase a single-family home. Borrowers must undergo housing counseling. CalHFA does not fund the loans. Private lenders underwrite and fund them.

    • Credit Union options: If your school offers a credit union, take advantage of the benefits. Credit unions often have favorable home financing options. They often have low interest rates and fees. They also have flexible underwriting guidelines.
 

TIPS ON HOW TO GET A HOME LOAN WITH BAD CREDIT

As you can see, you have options even with bad credit. Before you jump in and apply, though, consider these tips:

  • Explain your case: Lenders want an explanation for your bad credit. They may ask for a Letter of Explanation. In the letter, state the reasons why you have a poor credit history. Provide as much detail as possible. For example, if you fell ill and were unable to work, state the dates and facts. It helps if you provide documentation proving your case as well.

  • Work on your credit: Once you are back on your feet, work on improving your credit. This won’t happen overnight. Consistently make your payments on time. Don’t overuse your available credit, though. If you must re-establish new credit, open one account at a time. If you have accounts you no longer use, keep them open. Older accounts help your credit score increase.

  • Shop around: Don’t fall for the first lender who qualifies you for a loan. No matter how relieved you feel, shop around. Do your homework. Different lenders have different programs. Even two lenders offering the same FHA loan may charge different fees and rates. Getting mortgage information is very important to decide which loan is best for you. Shop with at least three lenders to see what is available to you. This way, you can make an informed decision.

    You may find that it is easier to qualify for a fixed rate mortgage rather than an adjustable rate mortgage (ARM). The adjustable rate will begin with one rate for the first year, and then change through the life of the mortgage, subject to what mortgage rates are doing at the time. ARMs are tied to an index rate, usually the LIBOR. There is a risk for buyers who have low credit and are higher risks, since they may not be able to afford the new payment if it increases after the introductory period.

Is it possible to get a home loan even with bad credit today?

Today a bad credit mortgage is absolutely possible

Yes you can get approved for an FHA mortgage with as little as a 3.5% down payment and with a credit score of only 580. You may also qualify for a home loan with an even lower credit score as low as just 500, though you will need to put down 10% instead instead of 3.5%.

Bad Credit Home Loans

In the past, applying for a loan involves a thorough check up on your credit history and income background. If your history is less than perfect or if your income is not that high or both, then your application for a loan is instantly rejected. This practice limits the number of people who can apply for a loan.

Today’s market has adopted more flexible methods. Bad credit mortgages makes it possible for people with low credit scores to still apply for a home loan and get approved. When applying for a bad credit home loan, no pre-qualification process is involved. Lenders who offer bad credit mortgages among their list of loan programs give their customers a chance to redeem themselves by helping them work on their loan package to help them get approved. With a bad credit mortgage, your credit history is nothing more than history and you can still get into the home of your dreams.

Bad Credit Mortgages May Come With Higher Interest Rates

 Bad credit home loans/ mortgages are usually characterized by higher interest rates. Lenders charge borrowers a higher rate of interest in exchange for their bad credit mortgages as compensation for the risk they take. Like it or not, borrowers who have bad credit are higher loan risks and are viewed as such by lending companies.

 In exchange for letting customers with bad credit scores and issues with their credit history a mortgage, higher interest rates are charged. This helps protect the lender should something happen and they have to foreclose on the borrowers bad credit mortgaged property. Today, the FHA helps subsidize lenders to insure a percentage of your mortgage to allow for lower down payments and lower credit scores than ever before.

 

 Be Aware of Discount Points Added To Bad Credit Mortgages

Being charged discount points in a bad credit mortgages is common. A discount point is equal to a percentage of the total purchase price. Bad credit mortgage borrowers are charged higher discount points, usually three to five points. Borrowers with credit may not pay for these points or they do but only for a very low percentage. With bad credit mortgages however, points may go as high as ten, although going this high is not a common practice and against federal law. It all boils down to insurance for the lending company. Lending companies want to make sure that they’re getting their money back from their customers’ bad credit mortgages.

Look For Larger Down Payments Being Requested for Bad Credit Mortgages

 Typically bad credit mortgages call for a larger down payment compared to other types of mortgage loans. In exchange for ignoring the costumer’s credit history, lenders may charge a larger down payment from the total purchase price. This gives the lender a greater comfort level that you wont just run if things get tough. . If you can afford the down payment required, a bad credit mortgage might even prove a good thing for you. Since the down payment you made takes a considerable portion of your purchase price, this means that you will pay lower monthly payments due to the lower total mortgage amount on your bad credit mortgage.


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