You dream of owning a home but there’s just one issue. Your credit isn’t the best. Maybe you’ve missed some payments or have gone through a short sale, foreclosure
, or bankruptcy. Whatever the reason, If you have fair to bad credit, it will be more difficult to get approved for a mortgage but it’s not impossible. There are government-backed mortgage options and private lenders that work with first-time homebuyers with bad credit. Read on to learn more about your mortgage options.
Overview of the best mortgage lenders for bad credit
|Freddie Mac Home Possible Mortgage||Borrowers with no credit score or low credit score|
|Fannie Mae HomeReady Mortgage||Low down payment requirement of 3%|
|USDA Loans||Low-income borrowers in rural areas|
|FHA Loans||Borrowers with a credit score of 500 or above|
|Carrington Flexible Advantage||Borrowers with a history of bankruptcy, foreclosure, or short sale|
Best home loans for bad credit
Freddie Mac Home Possible® Mortgage
Freddie Mac offers home loans with the Home Possible® Mortgage
to borrowers with a lower income and can be a good option for those who don’t have great credit.
You might be eligible even if you don’t have a credit score. To qualify, the home loan must not have a loan-to-value, total-loan-value, Home Equity Line (HELOC), or high-total-loan value be more than 95%.
Getting a Freddie Mac mortgage with no credit score requires a minimum down payment deposit of 3%.
It’s also known for being flexible on income limits, which is good for low to middle-class borrowers. Freddie Mac is a government entity that was created by Congress to make homebuying more accessible.
Fannie Mae HomeReady Mortgage
The Fannie Mae HomeReady Mortgage works with lower-income borrowers, whether you’re a first-time homebuyer or a repeat homebuyer.
To qualify, there is a minimum credit score requirement of 620 and there is a 3% down payment requirement. This option is attractive to those with a low credit score or a small down payment.
First-time homebuyers who qualify for an affordable mortgage through Fannie Mae may be required to participate in Homeownership Education and Housing Counseling. This is the case for borrowers with no credit score.
The counseling is an online program that helps borrowers understand the homebuying process. It can also help you decide what you can afford and how to choose a loan. Fannie Mae is also a government entity created by Congress to make homebuying more affordable.
The United States Department of Agriculture (USDA) offers home loans to borrowers who are considered low to very low-income.
USDA loans are reserved for people living in rural areas, typically places with a population of less than 35,000. The USDA loan program offers home loans that don’t require any down payment and has repayment terms of up to 33 years.
For very low-income borrowers, it’s possible to have up to 38 years to pay back the loan.
Through the USDA program, many lenders want to see a minimum score of 640. The loans are designed for low-income folks in rural areas to make homeownership possible.
There are home loans available to veterans via the U.S. Department of Veterans Affairs (VA). Though the loans are through private lenders they are backed by the VA.
According to the Veterans Affairs website, “With a VA-backed home loan, we guarantee (or stand behind) a portion of the loan you get from a private lender. If your VA-backed home loan goes into foreclosure, the guarantee allows the lender to recover some or all of their losses. Since there’s less risk for the lender, they’re more likely to give you the loan under better terms. Nearly 90% of all VA-backed home loans are made without a down payment.”
So the good thing with this option is that in many cases, there are no down payment requirements. Plus, mortgage insurance isn’t a requirement, either.
VA loans are also more affordable as they tend to have lower interest rates. There aren’t credit score requirements set by the VA but you’ll need to meet the underwriting criteria that the lender sets. Veterans can take advantage of these perks and make homeownership possible. You can see more about how to apply here.
The Federal Housing Administration (FHA) has been supporting homeowners since 1934 through FHA loans.
The FHA, which is part of Housing and Urban Development (HUD), can insure the loan, which helps you score a better deal from a lender. So FHA loans are considered a government-backed mortgage.
FHA loans are attractive because they are suitable for borrowers with poor credit and those who have a low down payment. The down payment can be as low as 3.5% of the overall purchase price.
There is a minimum credit score requirement of 500 to be eligible for a VA loan. But if your credit score is that low, you’ll be required to put down 10% instead of 3.5%. If your score is 580 or above, you’ll likely only have to put down 3.5%. Find out more info here to get started and check your state to see if there are additional home-buying programs you may qualify for.
Carrington Flexible Advantage
Carrington Mortgage Services, which was founded in 2007, offers home loans to borrowers with not-so-perfect credit as well as high debt-to-income ratio
borrowers through their Carrington Flexible Advantage product.
The minimum credit score requirement is 550 and you can borrow up to 1.5 million dollars. What makes this option stand out is that you can qualify for a home loan even if you’ve experienced foreclosure, bankruptcy, or a short sale recently.
The option is also good for self-employed borrowers. The company allows bank statements as proof of income instead of tax documents. Also, there is no mortgage insurance required.
Carrington also offers the Carrington Flexible Advantage PlusSM and Carrington Prime Advantage for people with higher credit scores of 620 and 660 respectively. These options allow borrowers to take on up to $2 million or $2.5 million.
As you can see, Carrington offers various mortgage loans for people at different stages with their credit.
Best mortgage lenders for bad credit summary
|Lenders||Credit score||Down payment||Additional info.|
|Freddie Mac Home Possible Mortgage||N/A||3%+||Income flexibility; 15 or 30-year fixed-rate mortgage|
|Fannie Mae HomeReady Mortgage||620||3%+|
|USDA Loans||640||N/A||Must be low or very low-income; borrowers in rural areas; up to 33 years to repay loan|
|VA Loans||Vary||N/A||No Private Mortgage Insurance (PMI) required; must be a veteran|
|FHA Loans||500||3.5%+||FHA insures the loan|
|Carrington Flexible Advantage||550||N/A||Borrowers with bankruptcy, short sale, or foreclosure in credit history are eligible; home loans up to 1.5 million dollars; no PMI required|
What is the minimum credit score I need to get a mortgage?
The minimum credit score required for a mortgage will vary by lender. The lowest credit score requirement for an FHA loan is 500. Having that credit score will require a higher down payment of 10%.
For borrowers with a credit score of 580 or above, it’s possible to take advantage of the low down payment rate of 3.5%. In general, though, having a credit score of 580 is what you need to get approved for a government-backed mortgage.
To qualify for a conventional loan, typically the minimum FICO score required is 620, according to credit bureau Experian. A very good credit score to qualify for a mortgage is 740. The higher your credit score, the better chance of approval you have.
What other factors are considered when applying for a mortgage?
Your credit score is just one factor that mortgage lenders use to determine your eligibility for a home loan. Of course, it’s hugely important, there are factors considered such as your income, down payment, as well as your debt-to-income ratio.
Lenders want to know that your income is sufficient enough to repay the loan. Having 20% or more for a down payment is a good idea and can also help you avoid Private Mortgage Insurance (PMI). Your debt-to-income ratio is based on the amount you pay towards debt each month relative to your gross income. Having a debt-to-income ratio of 36% or less is attractive to lenders.
What can I do to boost my credit score?
If your credit score is lower than the minimum credit score required to obtain a mortgage, you’ll want to take steps to improve your credit. Your FICO score consists of various contributing factors.
The two factors that have the largest impact are your payment history as well as the amounts owed. Your payment history makes up 35% of your credit score. The best thing you can do is make sure to pay all your bills on time. You’d also want to pay off revolving debt like credit cards.
Amounts owed make up 30% of your credit score. This refers to your credit utilization, which signifies the amount you’ve borrowed in comparison to your total credit available.
So if you have a $2,000 credit limit and are charging $1,000 per month, your credit utilization rate is 50%. Lenders want to know that you can use the credit available to you responsibly. It’s a warning sign for them if you use too much credit. To boost your credit score, watch how much you’re charging, and keep balances below 30%.
Also, be mindful of applying for new credit and closing old accounts. New credit also affects your credit score as well as your length history.
What is a government-backed mortgage?
A government-backed mortgage is a specific type of mortgage loan that is insured by a federal agency.
For example, the Federal Housing Administration (FHA), The Department of Veterans Affairs (VA), as well as the United States Department of Agriculture (USDA) all offer government-backed loans. These include FHA loans, VA loans, and USDA loans which all have specific eligibility requirements. By insuring the loan, the government offers some protections to lenders if a borrower is unable to repay the mortgage.
Fannie Mae, as well as Freddie Mac, are entities created by Congress to help make homebuying more accessible and affordable to first-time homebuyers. According to the Federal Housing Finance Agency:
“Fannie Mae and Freddie Mac buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. Lenders use the cash raised by selling mortgages to the Enterprises to engage in further lending. The Enterprises’ purchases help ensure that individuals and families that buy homes and investors that purchase apartment buildings and other multifamily dwellings have a continuous, stable supply of mortgage money.”
Government-backed loans differ from conventional loans with a private lender. Government-backed loans may have specific requirements to qualify. Conventional loans typically require good credit to be eligible.
What is a conventional loan?
Conventional loans are likely what you think of as a traditional mortgage. Conventional loans come from private lenders and aren’t backed by the government, which can make it riskier for lenders. That’s why many conventional loans have stricter credit requirements and a higher minimum credit score of 620. Credit scores of 740 and above may qualify for the best interest rates.
For conventional loans, you want a down payment of 20%. If your down payment is lower than 20%, you’ll likely be required to obtain Private Mortgage Insurance (PMI).
What is private mortgage insurance (PMI)?
If you apply for a conventional mortgage loan and have a down payment that is less than 20% of the purchase price, you will likely be required to get private mortgage insurance (PMI). The insurance covers the lender if a borrower stops making payments on the mortgage.
Private mortgage insurance can boost your chances of getting approved for a mortgage but will add to the cost of the loan. Typically private mortgage insurance is paid as a monthly premium on the mortgage. Some lenders work with borrowers who have less than 20% for a down payment and don’t require private mortgage insurance. However, the interest rates may be higher in this case.
What debt-to-income ratio do you need to qualify for a mortgage?
When applying for a mortgage, the lender will review your debt-to-income ratio. That’s essentially how much you spend in monthly debt payments relative to what you bring in each month with your income.
You can calculate your debt-to-income ratio by adding up your monthly debt payments. After that, you want to find out what your gross monthly income is (before any taxes, etc, are taken out). Then, take your total debt payments and divide them by your gross monthly income.
For example, if your monthly debt payments are $1,000 and your monthly gross income is $3,000, your debt-to-income ratio is 33%. Typically, the highest debt-to-income ratio that you can have and still qualify for a mortgage is 43%. The reason being is that there is evidence showing that borrowers with a higher debt-to-income ratio are considered a risk and may have more trouble making mortgage payments. There may be some lenders who will work with you if your debt-to-income ratio is higher, but it’s rare.
Some lenders use the 28/36 rule, which states that 28% of gross monthly income should be the maximum you spend on housing costs and that no more than 36% should go toward all debt payments. You can consider this general rule when planning to apply for a mortgage.
There are ways to lower your debt-to-income ratio, such as paying down debt and increasing your income.
Why you should check out these lenders
If your credit requires some improvement and you dream of owning a home, not all is lost. You can check out the lenders listed above who work with borrowers who have less than ideal credit. On top of that, you can also research credit unions in your area to see about mortgage options and any eligibility requirements.
Many of these mortgage lending options are designed to work with first-time homebuyers that may have a low income with bad credit. So while you may not be approved for all conventional mortgage loans, you can consider the loan options listed above. Depending on your credit, you may need to put down a higher down payment and have a higher interest rate.
The bottom line
If you have bad credit, buying a house is still possible through various mortgage options like government-backed mortgages and private lenders. Make sure to read through the eligibility requirements when it comes to your credit score as well as any down payment requirements. When working with mortgage lenders for bad credit, don’t be afraid to ask questions so you can make the home buying process as easy as possible.