How to Get a Mortgage Loan When You Have Bad Credit
Bad credit may seem like the ultimate brick wall between you and a new home purchase. Fortunately, there are ways to break down that wall and move into the home of your dreams. By taking the proper steps, it is possible to get a mortgage loan with bad credit, and this transaction can even help you to improve your credit for the future. Use this handy guide to learn about the process, and discover the facts about low credit scores and mortgage lending.
What Constitutes a Low Credit Score?
A credit score typically ranges from 300 to 800 for the four different credit reporting bureaus. When considering large lines of credit, like a home mortgage, any credit score lower than 580 is considered high-risk (i.e. “bad”). Many factors go into these low scores, including lack of established credit, missed payments, and the amount of available credit that you have been given. A number of free credit report websites can offer details on your credit score and the credit history that has impacted it. If your credit score is lower than 580, there are still options available for mortgages and home purchases.
FHA Loans for Buyers With Bad Credit
One of the best options for home buyers with bad credit is an FHA loan. These loans were established to help encourage home purchases for first-time buyers, and they allow people with bad credit to still obtain a loan. If your credit score is under 580, you are required to pay 10% down on a home in order to qualify for the loan. For example, if a home costs $150,000, you will need at least $15,000 to get approved for the FHA loans. If your credit score is above 580 but still too low to qualify with traditional lenders, you may be able to obtain an FHA loan with only a 3.5% down payment.
Along with getting approved for the loan, the FHA agreement comes with several benefits. To help make the home affordable, FHA loans often include lower interest rates, lower mortgage insurance fees, and reduced closing amounts.
Showing Responsibility for Paying Back a Loan
Even if your credit is low, recent actions can improve your chances of getting approved for an FHA loan. Once you apply for a mortgage through a lender, they will take a detailed look at your recent credit history. Showing signs of improvement and responsibility can make a big difference in your ability to get approved. By paying back other debts and consistently doing it on time, you can show that you would be a responsible buyer. For at least six months to a year, you should have on-time payments for any bills or other credit that you may have. Waiting this out and focusing on current payments can help you get approved for an FHA mortgage in the near future.
Increasing the Odds of Getting Approved
Keeping your credit record clean and clear of any red flags is an ideal way to get approved for a loan. For example, it's not a good idea to cosign on any other loans or credit applications for family and friends. This can directly impact your score and may look bad on a mortgage application. It's also a good idea to choose a mortgage amount that is realistic and affordable. If you cannot afford the 10% down payment for an FHA loan, consider shopping around for lower-cost homes.
Ensuring your financial stability is the best way to show lenders that you are a qualified buyer. This includes making payments on time, keeping the same employer, and building a proper savings account. All of these factors can combine with your credit score to help you get approved for a loan.
Next Steps When You've Been Turned Down for a Loan
Getting turned down for a home loan may feel devastating, but it is not the end of the line. By being proactive, you can improve your situation and help increase your chances of getting approved for a loan in the future. One of the main things to focus on is increasing your credit score. To help get approved for new credit, you can apply for a secured credit card. These credit cards require a deposit placed on them in an amount equal to your starting credit line. For example, you may apply for a secured credit card with a $250 deposit. This deposit would give you a $250 credit line that can be used to make purchases and monthly payments. When reporting to credit bureaus, the card shows up as normal credit and allows you to build up your score.
It's also good to start saving as much money as you can at the same time. Building a larger savings account can help you make a larger down payment and get the mortgage loan approval that you seek.
Brick by brick, you can knock down the wall of bad credit and enjoy your future in a new home.
By understanding your low-credit options, you can still get approved for a mortgage.
Don’t let a low credit score stop your home-buying dreams. Check out the best FHA mortgage lenders for multiple options.