How It Is Possible To Get A Mortgage With Bad Credit

Why A Mortgage Is Useful

Renting a home simply can’t compare to owning real estate when it comes to your finances.

Owning real estate comes with a big list of benefits.

Having total freedom to renovate your home and not having to worry about lease renewals is great, but the biggest perk of all is financial.

Real estate is an investment and a mortgage grants access to the money you need to make that investment.
As the value of your home increases over the years you’ll have the option of selling it at a profit.
This could mean very good things for your personal finances and net worth.
A home is a safe investment in good times and bad. You can always live in your home and that’s more than you can say for shares and equities.

A mortgage is an essential step on the path to home ownership - but applying for one with bad credit can be a challenge.

How Bad Credit Can Impact Mortgage Applications

There are several factors that influence the success of a mortgage application:

Your income
The size of your mortgage compared to the property’s value
your credit score

Having bad credit can make things a little more challenging when it comes to applying for a mortgage. Here’s why.

Banks and other lenders are always keen to lend to customers who are likely to pay their monthly installments on time.
Industry research shows that customers with bad credit are far more likely to default on their mortgage payments than those with good credit scores.
You may find it more difficult to get approved for a mortgage with a credit score below 650. Your APR and down payment may also increase.
Here’s an example of how bad credit can change the terms of a mortgage.
A customer with a relatively low credit score of 630 might have an APR of 5.50% on their mortgage
Someone else with a high FICO score of 800 may pay 3.30% on the same mortgage.
A difference of roughly 1.6% may not sound enormous, but it can amount to tens of thousands of dollars over the repayment period of a 30-year mortgage.

You don’t need a FICO score of 800 to qualify for a mortgage - but even a small increase in your credit score can save you a lot of money in interest payments over the years.

You can start improving your credit score today by taking a few simple steps.

Additionally, it’s also essential to know about the different types of mortgages that you can apply for as a borrower with bad credit.

What Types Of Mortgages Are Available For Borrowers With Bad Credit?

Your chances of being approved for a mortgage will always be higher if you know where to apply.

These specialty programs are specifically designed for prospective home buyers with bad credit.

FHA Mortgages

The Federal Housing Association offers mortgages with down payments starting at 3.50% of the property’s value.

You can apply for an FHA mortgage with a credit score as low as 500.

VA Mortgages

If you’ve served in the US armed forces during war or peacetime (including the National Guard) you may be eligible for a VA mortgage with 0.00% down.

Freddie Mac Home Possible

This mortgage program offers bad credit options with down payments starting from 3.00%.

RocketMortgage

Home Bridge and Citibank are just some of the lenders that offer mortgages to customers with credit scores in the upper 500s.

Their down payments currently start from 3.00%.

You may qualify for down payment assistance grants and credits. Visit Downpaymentresource.com for more information.

First-time home buyers can also benefit from incentives and assistance programs that are designed with their needs in mind.

If this is your first home purchase, you may be able to secure a low down payment and competitive APR.

What Are The Drawbacks Of Mortgages For Bad Credit Borrowers?

Bad credit mortgages are a great way to buy real estate with a low FICO score - but there are a few disadvantages you’ll want to consider before you apply.

Higher APRs - Low credit scores often result in higher-than-average APRs. This can increase the amount of interest you’ll pay on your mortgage over 20 years.
Higher closing fees - This is another type of expense that tends to be higher for bad credit customers.
Large down payments - Mortgage providers may be willing to overlook a low credit score if you’re willing to provide a larger down payment - but you’ll need to have this amount available in cash.

It’s always a good idea to shop around for the best possible mortgage you can obtain with your current credit score.

Another effective strategy is to try and increase your credit score to secure favorable mortgage terms.

How Can Borrowers Improve Their Chances Of Loan Approval?

There are several steps you can take to make your mortgage application more attractive to banks and other lenders.

We recommend the following:

Check and improve your credit score - Visit AnnualCreditReport.com to obtain your free annual credit report. If you notice any errors, contact the credit bureaus and have them corrected.
Never miss a payment - Your payment history counts for 35% of your credit score. Making payments on time can boost your score significantly.
Pay down your credit cards – However, don’t cancel them. Keeping low balances on your cards will lower your credit utilization and raise your FICO score.
Budget effectively - You’ll need to spend less than you earn each month to save up a down payment for your future home and have cash available to make mortgage payments.
Try a rapid rescore - You can ask your lenders to submit your latest credit usage and payment information to the credit bureaus and ask them to recalculate your credit score. Note that only your credit provider can make this request - you can’t contact the bureaus directly and ask for a rescore.

Key Takeaways

A bad credit mortgage could make home ownership a reality for you - especially if you’re a first-time buyer.

Increasing your credit score, balancing your monthly budget, and shopping around for the mortgage that suits your needs will ultimately increase your chances of success.

How to Apply For A Mortgage With Bad Credit