Buying a house can be a difficult task, especially if you have poor credit. It is widely assumed that the higher your credit score, the more likely you are to get approved for a home mortgage. Although it may appear practically difficult to obtain a loan and begin the home-buying process, this does not rule out the possibility of doing so.

Are you aware that there are home loans for people with terrible credit? With a poor credit score, you might believe that your credit is just as much of a stumbling obstacle. The truth is that even if your credit is bad, you can still receive a mortgage. Of course, there are programs specifically designed to assist clients with poor credit in obtaining mortgage financing. We’ll go over how to buy a property with terrible credit in this article.

Let’s take a look at what credit score means before we talk about the minimum credit score for a mortgage. Classified credit scores range from a low of 300 to a perfect score of 850, according to FICO (the most widely used scoring model). According to FICO, many consumers’ credit ratings are not in the highest range. The following are the credit score range with their classificationof the score.

• 800 or above – Exceptional
• 740 to 799 –     Very good
• 670 to 739 – Good
• 580 to 669 – Fair
• Under 580 – Poor

How to Buy a House with Bad Credit?

Generally, a bad credit score is anything less than 670. Having a score of 620 or higher is suitable for a conventional mortgage. You have a fair score if your number is between 580-669, while a poor score is 300 – 579. When you have a low credit score under 500 might make your mortgage processing a bit hard, and you will probably need to focus on increasing your score first.

What Credit Scores Are Considered Bad to Qualify for A Mortgage?

Getting a mortgage has no credit score limit that will disqualify you, but it may make your mortgage processing a bit hard. The lower your score, the harder it will be to find a lender that can approve your loan. Lenders see applicants that have poor credit scores as more likely to default, which implies the lenders are less likely to get their money back in addition to interest. Lenders have different ways of evaluating loan applications. While some offer loans to borrowers with low credit scores, others will pass.

How does bad credit affect a home loan application?

While it is possible to get a mortgage loan with bad credit, you must be ready to pay a higher monthly payment due to much higher interest rates. In the loan application, lenders access the borrower’s credit scores and decide whether to approve a loan application or not and also how much interest to charge. Some relevant factors that are considered during the assessment include loan-to-value (LTV) and debt-to-income (DTI) ratios, but the most important decision-making is the credit scores.

If you buy a home while having bad credit, you can always repair your credit and refinance your mortgage for much better terms.

Types of home loans that are available for those with bad credit

Even with bad credit, a borrower can buy a home in a variety of ways, including some that are specifically designed for borrowers with credit ratings below 620. We’ve compiled a list of the finest mortgage loans for people with weak credit, with varying credit score criteria. Check out the following options:

• FHA loans: These loans are insured by the Federal Housing Administration and maybe the best option if you have a lower credit score or don’t have much cash prepared for a down payment. FHA loans have a minimum credit score of 500, with an average score of 680.
• Conventional loans: When you have a credit score of 620 or higher, you are qualified to apply for a conventional loan. You might be offered a higher interest rate if you have got a score that is below 620. Conventional loans have a minimum credit score of 620 to 640.
• USDA loans: It’s recommended you have a credit score of 640, which is preferred when you apply for a conventional loan, while the minimum is 580. There’s flexibility to go lower in certain situations. The U.S. Department of Agriculture ensures these loans. These loans are designed for low- and moderate-income homebuyers looking to purchase a home in rural areas.
• VA loans: These loans are insured by the United States Department of Veterans Affairs and have no credit score requirement. VA loans were created for select members of the military community, their spouses, and other eligible beneficiaries. No need to have a minimum credit score requirement to access these types of loans, but lenders require you have a score of 620 or higher to access these loans.
• Freddie Mac Home loans: These loans are put in place to fast-track the accessibility of conventional loans to first-time homebuyers with moderate incomes. A borrower is qualified for as little as 3% down on the home for these loans. What makes it exceptional is that you may be eligible for a loan even if you have no credit score at all.

5 Ways to Buy a House with Bad Credit

Bad credit can make you pay, especially when you consider the high interest rate. And it may be stressful as well when you have to look for a good offer if you can’t do much to improve your credit score before you take out a loan. These are the proven ways to buy a house with bad credit. 

1. Shop around for lenders

Shop around with lenders that offer the specific loan you are looking for. Some lenders offer better financing terms than others, and through this step, you may be able to save thousands of dollars for yourself. All it takes is to check the various lenders, their interest rate, and fee payment. Besides, there are many non-bank lenders, online banks, credit unions, community banks, mortgage bankers, and even mortgage brokers who want to partner with you. They have different borrowing options.

2. Look for all types of loans designed for borrowers with poor credit

Search for programs generally used by first-time and low credit buyers, such as USDA mortgages (zero down), VA financing (zero down), FHA mortgages (3.5 percent down), Fannie Mae HomeReady mortgages (3 percent down), and the Freddie Mac Home Possible loan (3 percent down). You are in a better position to get a house when you do this, even with your credit score.

3. Find a cosigner

Finding someone with strong credit to cosign your mortgage makes it easier to get your application approved for a mortgage. Lest you forget, asking someone to take financial risk is when they cosign for you. Rather, you might ask a friend or family member with better credit to cosign your mortgage because of the risk involved.

When you do, this will make the cosigner’s credit give your application a boost, whereas the cosigner will be responsible for the repayment of the entire debt, not just a part, if you default. Also, if payments are not done promptly or missed, it will damage the cosigner’s credit.

4. Check if you are entitled to down payment assistance

A borrower can use numerous down payment assistance programs to offset down payment costs via grants and credits. We have more than 2500 down payment assistance programs that are available nationwide.

5. Look for first-time buyer programs

The first-time buyer program is designed for a first-time homebuyer who has not owned a property in the past three years. As a homebuyer, you are eligible for first-time homebuyer programs even if you have owned property before.

Ways to increase my chances of getting approved for a mortgage

The best way to increase your chances of getting approved for a mortgage is to find out how to boost your credit. Here’s how:

• Pay Off Outstanding Debt on Time: Perhaps the most important aspect is determining the type of your credit score. Paying the outstanding debt you owe and pay on it until it’s paid in full bills can increase your credit score. Doing this is beneficial in taking care of your debt. For instance, if your overall debt responsibilities go down, you have room to take more, making you less risky in your lender’s eyes. Have a monthly reminder setup or automatic payments that can help you remember.
• Credit utilization: The amount of available credit you’re using is what describes credit utilization. Ensure to reduce some of your loan balances and keep your credit card balance to 30% of your credit limit or less.
• Obtain your credit scores through your bank, credit card issuer, or other sources, and appraise the credit scores in case of errors and disputes.
• Length of credit history: A long credit history positions in the eyes of lenders as a person who have experience managing debt. Keeping your credit cards open, even if you rarely use them, boosts this part of your credit score.
• Limit any applications for new credit to a three- to six-month window and pay down credit card balances if you’re carrying debt.
• Prompt payment of your bills is essential, and you may use issuer or calendar alerts to keep track of payment due dates.
• Keep your older accounts intact because closing any accounts with balances can affect your credit utilization ratio. Ensure to keep them open.

Other Factors that Mortgage Lenders Consider

Lenders consider many other factors for the assessment in addition to your credit score when you apply for a mortgage. These factors could largely affect the available options or the interest rate.

Knowing what the lenders are looking for before applying for a loan may be helpful when you acquaint yourself with relevant knowledge about what the lenders are looking for. Based on the lenders’ requirements, they have different standards for qualification.

Down Payment Amount

The difference between credible borrowers is the amount of down payment. The amount of down payment made indicates to your lender that you’re more creditworthy. So, the larger the down payment, the better the chance of getting approved for your mortgage and possibly lowering your interest rate.

There is a better chance of getting approved and obtaining a lower interest rate when you’re financially secure, even if your past finances negatively influenced your score.

Debt-To-Income Ratio

The percentage of your gross monthly income that you’ve budgeted to pay off your debt is calculated by dividing your total minimum monthly debt divided by your gross monthly income. DTI ratio evaluates your ability to pay back the money you’ve borrowed and based on.

Your lender uses your recurring debt like car loans, student loans, credit card debt, home equity loans, and any other recurring debt to calculate the DTI. The acceptable DTI is less than 50%, and anything less than this makes you qualify for a mortgage. In simple terms, the lower your DTI, the more loan options will be made available to you.

Leverage on other things that can help you improve your DTI ratios, like FHA or VA loans. Putting your best to pay off your debts is a good way to lower your DTI and get approved for a mortgage.

Income And Assets

Even your lender wants to play safe. They have an interest in borrowers maintaining steady employment. In this case, income and assets are vital for determining your mortgage eligibility. Lenders often require borrowers to provide two years of proof of income and assets because the more income you have, the more likely you get a lower DTI. And this subsequently improves your chance of making your mortgage payment every month. The interest rate you’re offered is affected by your income earned.  

With this article, we expect you to better understand how to buy a house with bad credit.