Mortgage Loans For Bad Credit
Bad credit can make it especially difficult to access loans, especially mortgages. Fortunately, there are lenders that are stepping in to make the dream of homeownership a reality. We will explain how to search for and select the best mortgage loans when you have bad credit and need financing. If you have a low credit score, a bad credit mortgage loan might be the quickest and the best option given these lower, minimal qualifying requirements. Still, you have to seriously consider some facts and figures to get the best value from the mortgage and avoid potential pitfalls.
Keep reading to learn more about:
- Bad credit mortgages
- Mortgage loans
- Details, rates, & types
- The process of finding mortgage loans when you have a bad credit score
- When should you consider rejecting a mortgage loan offer
- How to increase the chances of getting approved for a mortgage loan
Bad Credit Mortgage
Your financial health is measured by a credit score, and although it might not account for all the variables of your life, financial institutions heavily rely upon this score to validate your credibility when you apply for a loan or a credit card. In simpler terms, this 3-digit number demonstrates your financial trustworthiness.
A credit score is based on your credit history and ranges from 300 to 850. This score uses information from your credit reports that are submitted by financial institutions. In the US, this information resides with three major credit bureaus – Equifax, TransUnion, and Experian. The higher the score, the easier it is to access credit approval from lenders.
Still, a bad credit score can have a really negative impact, because it indicates that you’re a risky borrower. Thus, if your loan request is approved with a bad credit score, you will accordingly be charged a higher interest rate based on your higher risk of late payment or default. In many cases, creditors are open to taking risks, but if your credit score is near the low end of the range, many of your applications are likely to be rejected.
Other than difficulty accessing financing, you might also find it difficult to rent apartments. Utility service providers might even ask you for security deposits and you’ll probably end up paying higher insurance premiums as well. Yet, in case of dire need, you can always apply for mortgage loans. These bad credit loans feature some of the most lenient parameters for qualifying.
What Is the Minimum Credit Score Needed to Take a Mortgage Loan
Mortgage loans, as the name suggests, are loans specifically designed for buying a property that you can access in exchange for agreeing to pay a certain amount beforehand (down payment) and periodic monthly repayments.
Most mortgage lenders are okay with accepting credit scores as low as 500 with a 10.00-15.00% down-payment. This down payment percentage may decrease with certain banks if the score is higher than the minimum but still too low to apply for standard loan options. For most conventional mortgage loans, the standard down payment is 20.00%.
Let’s take a quick look at the top lenders with the lowest rates for FHA mortgage loans.
- BNC National Bank
- Accepts a credit score of 580
- Minimum down payment of 3.00%.
- Charges a lender fee following loan approval.
- New American Funding
- Accept a minimum score of 580
- 3.00% down payment.
- Great mortgage loan that is perfect for first-time homebuyers with low credit scores.
- Accepts credit scores as low as 500
- 3.00% down payment.
- Offers free rate-locks and is great for credit-challenged borrowers.
- Rocket Mortgage
- Accepts a credit score of 580
- 3.00% down payment.
- Offer personalized mortgage rates based on their loan types and products.
- Quicken Loans
- Accepts a credit score of 580 for FHA loans
- A minimum down payment of 3.00%.
No matter what the minimum down payment percentages are, keep in mind that mortgage insurance may add 0.30% to 1.20% of your loan balance that is usually charged alongside the monthly mortgage repayment.
Unlike regular loans, mortgage loans require you to post collateral, in this case the property, as security. Accordingly, if you default on the mortgage loan, you will forfeit both your collateral and the payments you’ve already made including monthly repayments and the down payment. A default will also hurt your existing credit score and if you aren’t able to properly manage your finances, you might end up deeper in debt.
What Are The Different Types of Bad Credit Mortgage Loans Available Today
Based on your credit score, there are a few types of mortgage loans available. The minimum scores and interest/down payments will vary according to your selection.
Here are the most common mortgage loans for individuals with bad credit:
- FHA Loan – Unlike regular mortgage loans, Federal Housing Association (FHA) loans don’t have a ‘risk-based pricing’ or LLPA (loan-level pricing adjustments). Although FHA loans require a minimum score of 500, the majority of lenders won’t accept anything below 580. These loans are insured by the FHA and designed specifically for lower income borrowers.
- VA Loan – Contrary to the FHA, Veterans Affairs (VA) loans don’t have a minimum credit score requirement, but these loans are tailored to current US military service members, veterans, and surviving spouses. However, most lenders are fine scores ranging between 580 to 620 and these loans do not always require a down payment or mortgage insurance.
- USDA Loan – This is a government-funded loan from the US Department of Agriculture for eligible rural borrowers is accompanied by zero down payment. You will need a minimum FICO score of 640, however, and some lenders are okay to accept scores as low as 580. Although there is no down payment, borrowers have to accept fixed-rate loans and are unable to access the flexibility of adjustable-rate mortgage through this government program.
The Process for Finding a Mortgage With Bad Credit
There is no denying that it is very difficult to access a loan with a bad credit score. Still, financial instabilities are part of life and it shouldn’t necessarily stop you from fulfilling your dreams. While getting a mortgage approved for scores as low as 500 is possible, it does come with higher interest rates as well as other add-on expenses like lender fees and mortgage insurance fee.
If you are seeking a mortgage, either online or offline, here are some important things to take care of in advance:
- Check your current credit report for erroneous marks that may negatively impact your score
- Filter out the banks/organizations offering mortgages for this score
- Compare the rates and related terms and conditions for each
- Expand your search to cover private lenders, banks (community and national), and credit unions - Consult with a mortgage broker (they’ll charge a fee but can recommend the best options)
- Consult the Lender Search List available on the public domain, courtesy of the Department of Housing & Urban Development
When Will You Want to Consider Rejecting a Bad Credit Mortgage Loan
Most lending agencies ask you to fill a lengthy questionnaire online that matches your answers to their predefined parameters to tell if you’re approved for a mortgage loan or not. Still, getting approved for a loan doesn’t necessarily mean that you have to or should take it.
Although you may need the money, you should let go the offer if:
- The monthly mortgage installments consume more than 30% of your income. Taking into consideration the fact that you might already owe other debtors or have limited income, this type of commitment might push you to default on payments which will lead to further problems and have a negative impact on your credit score.
- The interest rate is extravagant. With low scores, comes higher interest rates. Although the minimum rate starts around 3.00%, it can go much higher, even past double digits, depending on multiple factors. In this case, it is probably better to explore other options.
- The amount you owe is already piled high. In a situation where you already owe multiple creditors and are struggling with payments, you don’t want to add additional responsibility. Wait until you are able to capably manage your finances, and then re-apply. In the meantime, focus on clearing your current debts as quickly as possible to help improve your credit score and potentially access better rates in the future.
- Additional costs at the time of signing the contract. Remember that most lenders will ask you to pay at least a 10% down payment and there may be other costs incurred like origination fees, closing costs, and more. Before you accept any offer, make sure that you have these expenses covered.
Increase Your Approval Chances
If you are thinking of applying for a mortgage with a low or bad credit score, let us reassure you that it is difficult, but not impossible. Here are some actionable steps you can take to strengthen your chances of approval:
- Work on saving a larger down-payment. If you offer a larger down payment, a lender will be more confident and possibly able to offer you better mortgage terms at lower interest rates.
- Find a guarantor or a co-signer. If you can, bringing in someone who is willing to take legal responsibility for paying the lender in case you default on payments, is also helpful for obtaining better terms and approval. While it might be tough to find a guarantor, there is no harm in trying and it can only help your chances of approval.
- Clear existing debts. Your existing debts also play a big role in determining if you’ll be able to afford another monthly instalment and impact your credit score. If you lower your outstanding debt and demonstrate a moderate income, a lender will have more reasons to approve your application.
- Improve your credit score. Pay off balances on or before the due date and try limiting your credit utilization to lower than 30%. A positive track record of on-time payment will go a long way towards improving your score and reassuring lenders.
Getting a mortgage with bad credit is tough, but possible if you compare the terms for the best rates and explore the special programs available. However, before applying, it makes sense to work on clearing existing debts and improving your credit score. This way, you will end up increasing your chances of mortgage approval without the highest interest rates that accompany many bad credit mortgage loans. Better yet, you will also increase your chances of getting approved for more conventional loans that offer more affordable terms.