Mortgage Loans For Poor Credit (And What You Need To Know)

There is a common notion that you have to have excellent credit and a substantial down payment to get a mortgage loan with reasonable interest rates. Thankfully for people with low credit scores, this is not the case. Getting a home loan with bad credit is possible, but some compromises and steps need to be made to accomplish it. Here are a few things you need to know:

Mortgage Impact With Bad Credit

Your credit score will reflect what type of loan program you will be able to use and also the amount of money you are approved.

There are several loan programs out there, and with bad credit, you can usually rule out the traditional conventional housing loan option. It requires excellent credit and at least 20% down payment on the home to qualify. Bad credit borrowers should instead focus on alternative loan options that are still excellent choices for home loans. Federal Housing Administration (FHA) loans, for example, allow borrowers to have as low as 500 credit score to qualify. There are other loans, such as Veterans Affairs (VA) and USDA rural home loans, that may fit your guidelines as well.

Credit scores also affect how much you pay on a mortgage loan. Mortgage interest rates typically are higher on loans for borrowers with lower credit scores. Depending on the amount of down payment you use when purchasing your home, Private Mortgage insurance may be an additional expense as well.

Credit History

Your credit history also plays a role in loan approval. Borrower's with a history of negative accounts, late payments, high debt-to-income-ratios and defaulted loans will show a pattern to lenders. Knowing your credit history and knowing what those patterns will be before you apply for a mortgage loan will help you strategize how to overcome these shortcomings.

Come up with a plan of action now to overcome your past financial choices. If you have a history of late payments, set up a plan to keep current with your payments. You may also save up for a more substantial down payment than the minimum requirement may be for your home mortgage. If you have a high debt-to-income percentage that is hurting your credit score, work on paying down that debt and show you have more significant emergency savings available to cash flow expenses when emergencies crop up. Having thought about what the shortcomings are with your credit history and coming up with a plan to rectify it will make you look a lot more appealing to lenders you approach.

Knowing your credit history well will also help you see what types of loans you can get. Short sales, home foreclosures and bankruptcies all have additional guidelines that will help you know when you will be eligible for a mortgage loan again. Generally, borrowers can qualify for a government-insured home loan within two to four years, where sometimes it can take up to seven for a conventional loan.

Before you apply for a home loan know what your credit score is, search through your credit report and come up with a plan that will help you find the best type of loan and lender for your circumstance.