Applying and being approved for a home loan even if you have poor credit, may not be possible, but there are options for those with poor credit. Thus, although acquiring a mortgage with a low credit score will be difficult and costly, homeownership is still attainable with proper strategies.
What is a good credit score for a home loan?
The ideal minimum credit score that a borrower should have for a conventional mortgage from most lenders is often around 620. People with credit scores between 580 and 619 can still get approved for a loan but the interest rates will be relatively high.
However, if your score is less than 580, you will not qualify for a loan with most traditional lending institutions. However, there exist specific subprime lenders who deal with people with a low credit score and with ratings of as low as 500. Remember though that these loans have relatively higher interest rates and also have stringent qualifications.
What Credit Score Is Required For A Mortgage?
Yes, there are a few mortgage options for borrowers who have a credit score of 500 or lower. Subprime or non-prime home loans are developed for clients who have low credit.
Although, its interest rates are higher compared to the normal loans offered in the market, subprime mortgage can also enable one to purchase and finance a house. Thanks to the subprime crisis that occurred more than a decade ago, the demand for these products has reduced, but there are still legal subprime lenders.
The two main types of subprime home loans are:The two main types of subprime home loans are:
FHA loans – These are loans by different lenders that are guaranteed by the Federal Housing Administration for lower income and bad credit borrowers. Down payments can be as low as 10 percent of the value of the home, and FICO scores may be as low as 500.
Subprime mortgage- Extended by non-conventional non-prime lenders to individuals with FICO scores of 500-600. It may take 10-20% down and interest rates can range between 8-12%.
Subprime loans also have higher interest rates and additional requirements on your debt-to-income ratio, down payment, and cash reserves. However, they may be available to those willing and able to buy a car with a bad credit score.
True, this depends on whether or not the applicant has bad credit, but mainstream or traditional lenders are usually not willing to approve mortgage for such individuals without the following tips.
If your credit score is less than perfect, take steps to boost your chances of getting approved for a home loan:If your credit score is less than perfect, take steps to boost your chances of getting approved for a home loan:
Fix your credit – You should strive to raise your credit ratings before applying for a mortgage to be eligible for better rates. Ensure all bills on a credit card are paid on time in the future and work on reducing balances.
Make a larger down payment – A large down payment of not less than 10-20% is considered less risky by the lenders. Money that is paid down also decreases the total amount of money that must be borrowed.
Debt-to-Income Ratio – Your total monthly obligations on the loan including the mortgage should be below 43% of the gross monthly income. Reduce this ratio by paying off cards and loans.
Include a co-signer if you can – Including a co-signer with better income or credit score will help. When the co-signer signs, they become equally obligated to make payments, thus assuming equal responsibility.
Collect papers that describe credit troubles – If you have credit problems in form of difficulties such as job loss or health problems, they can be described in documents.
Go for subprime mortgage lenders - Expect to pay more in down payment and also higher interest rates but you get access to more loan products than with prime lenders.
Should I Rent Until My Credit Score Improves?
Some recommend waiting until the person’s credit is fixed and he can secure a prime mortgage that has more favorable rates. But, renting also has some cost implication both in terms of financial and non-financial aspects. If you are okay with accepting the higher payments and interest rates, it is possible to make more sense to buy with bad credit.
Accept the fact that you have a limited budget and that is why they will qualify for a subprime loan to afford the house of your choice. However, for the willing and able buyers, owning a home is achievable despite the current credit standards.
They are aware of credit difficulties that one has faced in the past. They provide practical methods of financing to enable the buyers who have a desire to own a house to achieve the dream. What this information shows is that one does not have to let bad credit get in the way of owning a home.
