According to FICO scores, approximately 11.1 % of Americans have bad credit scores. If you’re considering buying a first-time home, you may think that having a bad credit score works against you, but surprisingly, some companies offer house loans to those with bad credit. So how do you get a house loan with bad credit?
Your credit score isn’t the only factor lenders consider when you’re applying for a house loan. To get a house loan with bad credit, you must determine your FICO score and apply for a loan from lenders that usually offer loans to those with bad credit.
Starting the process of buying a house can be daunting, and doing it with bad credit may seem like an uphill battle. Thankfully there are a few methods to acquire a house loan with bad credit, and a few lenders are open to offering house loans to those with bad credit.
How To Get A House Loan With Bad Credit
The best solution before applying for a house loan is to improve your credit score. But this takes time, and you may need a loan sooner rather than later when purchasing a home. If your credit score is under 600, it’s usually considered a bad credit score.
If your score is under 500, getting a house loan may be even more challenging. Lenders don’t only consider your credit score but also consider factors like:
- How much do you have available as a down payment on a house
- How much income do you earn per month
- If you have any debt
- Your overall amount of debt
If you have a large amount of cash for a down payment, you have a better chance of getting a house loan. Your credit score may only allow you to qualify for a specific loan amount, but you could cover the difference with a significant cash down payment.
Steps To Get A House Loan With Bad Credit
If you’re looking for a house loan with bad credit, you’ll need to consider the following steps to help you get all the information you need to apply for a loan.
- Avoid making significant changes to your finances. A few big purchases and a new credit card can worsen your credit score. Also, avoid taking on new debt when applying for a house loan.
- Check if you qualify for down payment assistance. If you don’t have a down payment, you may be able to get down payment assistance that could help you get a down payment for your new home. There are roughly 2500 down payment assistance programs that may be willing to help you, even with a bad credit score.
- Try to save for a down payment. If you can save for a down payment, your chances of getting a house loan are more likely. This is because lenders and banks consider the amount of cash you have as a down payment when considering giving you a loan.
- Look for bad credit home loans. If you purchase a home for the first time, you may have access to low-income loan programs. These may be better for those with bad credit than a traditional loan.
- Don’t just apply at your bank. When most people want to apply for a house loan, they consider applying at their bank. However, there are many lenders and credit unions that can offer house loans as well as offer you better rates.
- Get a co-signer. If your credit score is pretty bad, it may be a good idea to consider getting a co-signer to co-sign for your mortgage. This is likely only to improve your application.
- Consider all your options. When applying for a house loan, you want the best deal possible, which requires looking for different options. Apply and ask as many companies as possible to see who will offer you the best deal.
- Avoid guaranteed approval loan offers. Guaranteed approval loans are shady, and there are never any guarantees when it comes to approving a house loan. These types of businesses should be avoided as they could lead to massive additional costs.
House Loans You Can Apply For If You Have Bad Credit
Even if you have bad credit, applying for a house loan through a home loan company that offers loans to those with low credit scores is still possible. Most of these lenders have a minimum credit score of between 500-660, but you may be evaluated based on other criteria if you have no credit score.
FHA Loans
Federal Housing Administration loans are one of the first options to consider when looking to buy a house with bad credit. They have flexible eligibility requirements and a minimum credit score of 500 with a down payment of 10%. The FHA also offers shorter waiting periods after circumstances like bankruptcy.
USDA Loans
If you want to purchase a house on agricultural land, you could apply for a loan with the USDA. These can be a bit more challenging because you need to be located in a rural area and have a low to middle-class income to qualify.
Freddie Mac Home Possible Loans
Freddie Mac house loans are available to those without credit scores. You’ll need a down payment of 5% to be eligible for this loan. If you already have a credit score and want to apply for this loan, you’ll need a minimum down payment of 3 %.
VA Loans
The VA loans are offered to veterans, their spouses, and those who are actively in service. No minimum credit scores and no down payment are required for this loan; however, lenders may want a score of 620 or higher.
Fannie Mae Home Ready Loans
The Fannie Mae house loans don’t use credit scores for eligibility but rather look at how well you pay your bills. If your down payment for your house is less than 20%, you’ll need to pay private mortgage insurance.
Tips On Improving Your Credit Score To Get A Home Loan
One of the best ways to qualify for more house loan options is to improve your credit score. Here are a few useful tips to help you improve your current credit score.
- Check your credit report. Most people find errors, missing information, and other mistakes in their credit reports that may negatively impact their credit scores. You can get your free credit report through the Annual Credit Report.
- Opt for a rapid rescore on your credit report to reflect recent changes to your score
- Avoid debt at all costs. Instead, draw up a monthly budget and stick to it to help you improve your credit score.
- Make all your month-end payments on time and pay them in full. By doing this, you’ll avoid penalties, and your credit report won’t be affected by late bills.
- It’s nice to pay off a credit card, but it can negatively impact your credit score once you do.
Conclusion
To get a house loan with bad credit, it’s best to approach a lender that offers these types of loans. Of course, you could always try to improve your credit score to give you a better chance of qualifying for a house loan. A large cash down payment can also work in your favor when applying for a house loan with bad credit.