Should You Get A Home Loan With Bad Credit
If youre having trouble qualifying for a mortgage that works for your situation, then it might be a good idea to take a step back. Justine Chan, real estate agent and founder of Live With Plum, a womans guide to home buying, suggests borrowers with bad credit ask themselves if it is absolutely essential to buy right now or if there is time to fix their credit first.
Having a healthy credit score isnt the only thing to work on as you move toward homeownership. The biggest mistake homebuyers make is not understanding the implicit cost of owning a home and how much closing costs are, Chan believes. So increasing your savings is also important.
Having more money in the bank makes it easier to cover closing costs, makes you a more appealing borrower, and puts you in a better position to handle unexpected home repairs. The last thing you want to do after making a $200,000 purchase is take out another loan, Borge said. He recommends having at least 3% to 5% of the purchase price set aside, in addition to any closing cost or down payment assistance you may qualify for, to cover moving and home expenses.
What Mortgage Lenders Will Work With Bad Credit
Little about home mortgages is obvious, clear, or easy to understand for homebuyers, especially when beginning the journey with a low credit score.
Dont get overwhelmed. There are programs available and people willing to help you. Start by connecting with a local, personal loan officer. They can outline the steps you need to take, the options you should explore, find lenders willing to work with you, and be by your side to identify all of the opportunities you have to own a home.
With a personal loan officer on your side, you, too, will be able to capitalize on your home-buying experience.
Check Your Credit Reports And Scores
Checking your credit reports and scores early in your house hunt can give you a sense of which home loans are realistic options.
What qualifies as a good or bad credit score can vary depending on the lender and the type of credit score . However, most mortgage lenders will review your credit reports from Experian, TransUnion and Equifax, as well as FICO® Scores based on each report. They typically use the middle score to help determine whether you get approved and to set your interest rate and repayment terms.
FICO® Scores range from 300 to 850, which are then divided into five score ranges:
- Very Poor: 300 – 579
- Exceptional: 800 – 850
The higher your score, the more options you’ll have for credit, including home loans.
If your middle score is below 500, you might not be able to get approved for a home loan and may have to focus on building your credit first.
With a middle score of at least 500, a government-backed FHA loan could be an option if you can afford a 10% down payment. There are also government-backed mortgages with middle-score requirements of 580, 620 or 640 and lower down payments.
Once your credit score is in the mid-600s, you may start qualifying for non-government conventional mortgages directly from mortgage lenders.
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Consider A Rapid Rescore
Credit report changes can take time to go through the system. That means improved scores might not show up in time for a mortgage application. In this case, you might want to get a so-called rapid rescore through your lender.
A rapid rescore allows a mortgage lender to submit proof to a credit agency that an applicant has made recent changes or updates to their account that are not yet reflected on their credit report, according to Experian. Borrowers cannot request their own rapid rescore the service is only offered to lenders. A rapid rescore isnt free, either, but the fee for adjusting your credit during your mortgage application could be offset by your lower interest rate.
Accept Help From Your Family
You have better chances at qualifying with poor credit if you can make a larger down payment. If saving up is a struggle, you can use money that is gifted by a family member.
Note, however, that this must not be a loan and you should have no obligation to pay the money.
Additionally, the gift must be properly documented and declared to your lender. Otherwise, the underwriter may flag the money as a new loan or a deposit from an unacceptable source.
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Next Steps: Explore Alternatives If You Cant Get A Mortgage With Bad Credit
If youre frustrated by the difficulty of getting a home loan with bad credit, you may wonder if you can buy a home using other sources of funding, such as personal loans.
Mortgage lenders typically dont allow borrowers to take out a personal loan for a down payment. Most lenders will want to know what the loan is for, and may not want to give you the loan for the purpose of purchasing real estate. And even if they do, paying for a home with a personal loan means you wont get the tax benefits associated with a mortgage, such as the ability to deduct mortgage interest when itemizing federal income tax deductions. On top of that, personal loans typically have higher APRs, which means youll likely end up paying more in interest over the life of the loan.
If you can qualify for a smaller mortgage and afford a less-expensive home, you might want to consider buying a fixer-upper and using a personal loan to make improvements after the home has been purchased.
You could also consider using a personal loan to consolidate and pay down high-interest debt more quickly. By repaying debt and making payments on time, you can lower your credit utilization and build a positive payment history, which can improve your credit. Both of these things can help you qualify for a mortgage more easily.
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You Can Get A Home Loan With Bad Credit
Fortunately, its possible to get approved for a home loan with bad credit. But if you do, you probably wont receive the best rate. Typically the higher your credit score, the better rate youll receive.
Lenders tend to view people with poor credit as riskier borrowers, so they charge a higher interest rate as a way to protect themselves against the risk of you defaulting on your home loan.
If youre curious about what rates you might qualify for, Credible lets you compare mortgage lenders in one place.
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Whats A Typical Bad Credit Mortgage Term Length
Bad credit mortgages are only meant to be used as a temporary stopgap measure while you get your finances in order. You wouldnt want to stay with a bad credit mortgage lender for long either. Thats why youll usually see bad credit mortgages with term lengths from 6 months to 2 years. Youll need to have an exit plan when applying for a bad credit mortgage so that you can transition back to aB lenderor A lender.
Ways To Buy A House With Bad Credit
While its not going to be as easy or affordable for a consumer with bad credit to purchase a house as a consumer with good credit, it is still possible to get a mortgage. Here are a few steps you can take toward securing a high-risk mortgage.
Although taking the time to rebuild your credit will always work in your favor when youre searching for a mortgage, being patient is especially important for those who have had a consumer proposal or gone bankrupt. Most conventional lenders are probably not going to even consider approving you for a minimum of two years after your case was discharged. So, its best to take that time to improve your finances and get your credit score back up.
Find Stable Employment
If you have good credit and a suitable income, even if youre self-employed or a commission based worker, prime lenders will still approve you for a mortgage. However, if you have bad credit, gone through a consumer proposal or bankruptcy, an unstable employment history will only add to a lenders opinion that youre a risky investment. For that reason, its best to find a stable source of confirmable income, especially if you one day hope to work with a prime lender.
Look Into Subprime and Private Lenders
Save For a Larger Down Payment
Improve Your Credit Score
For more information about Canadian interest rates, read this.
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Be A Good Steward Of Your Debt
This is the long game for good credit. Increasing and maintaining your credit score requires that you make your payments on time, utilize 30 percent or less of your available credit, maintain your accounts over long periods of time, and never let loans go into collections. The best thing you can do to increase your credit score? Pay off your debt. It takes time, but your credit score will be a credit to your efforts!
What Is A Mortgage Preapproval
When youre shopping for a mortgage, you can compare options offered by different lenders.
Mortgage lenders have a process which may allow you to:
- know the maximum amount of a mortgage you could qualify for
- estimate your mortgage payments
- lock in an interest rate for 60 to 130 days, depending on the lender
The mortgage preapproval process may be divided in various steps. It may also be called mortgage prequalification or mortgage preauthorization. Different lenders have different definitions and criteria for each step they offer.
During this process, the lender looks at your finances to find out the maximum amount they may lend you and at what interest rate. They ask for your personal information, various documents and they likely run a credit check.
This process does not guarantee your approval for a mortgage.
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Assess Your Unique Circumstances Before You Decide
On the other hand, applying on your own means the lender will only take into account your income and not your partners. This means you might qualify for a smaller mortgage. Regardless of whether one partner name is on the mortgage, his or her name can still be on the title of the home.
Understanding the ins and outs of credit scores and joint mortgages will help you and your partner take this major step together and get you closer to becoming homeowners. For answers to any questions you might have about joint mortgages, give our home lending advisors a call. Theyre happy to help.
What Do Mortgage Lenders Consider A Bad Credit Score
Theres no minimum credit score required to buy a house, as each lender has its own requirements. But most lenders look at your three-digit FICO score to determine how likely you are to repay a loan, and what type of interest rate to offer you.
If your FICO score is below 580, your credit score is considered “poor” or “bad.” A FICO score between 580 and 669 is considered “fair,” meaning its below the average credit score of most U.S. consumers. FICO scores ranging from 670 to 799 are considered “good” and “very good,” and FICO scores of 800 and above are considered “exceptional.” The higher your FICO credit score, the better mortgage rate you can expect to receive.
Minimum Credit Score Required For Mortgage Approval In 2021
Getting approved for a mortgage these days can be a real challenge, especially with housing prices constantly on the rise. In Toronto, for instance, youll be paying over $820,000 for a home, which is nearly $100K more than the average price the year before.
Unless youre rolling in cash, thats a lot of money to have to come up with in order to purchase a home. Moreover, a lot goes into getting a mortgage. Lenders look at a number of factors when theyre assessing a borrower for a mortgage such as a sizeable down payment, a good income and, of course, a favourable credit score.
A high credit score, in particular, will not only get you approved for the mortgage but a favourable interest rate as well. Being that credit scores are such a significant part of the lending process, its no wonder that we get so many inquiries about what qualifies as an acceptable score in terms of getting approved for a mortgage.
Below 600 Credit Score
FHA loans are your best bet. They were created by the Federal Housing Administration in 1934 to increase home ownership during the Great Depression. They have been utilized by more than 40 million families to purchase or refinance homes. The loans are insured, so lenders have greatly reduced risk. In 2019, FHA loans made up 15.8% of the market.
For FHA loans, a credit score as low as 580 can be accepted, with just 3.5% in equity. Scores dipping to 550 have been accepted, but a 10% equity position is required . Down payment assistance is non-existent and you will have a difficult time getting approved if your debt-to-income ratio exceeds 45%.
You might be required to show that a financial hardship was the reason you fell behind on your monthly bills, while displaying evidence that you have recovered.
Hopeful note: Nearly 20% of all homebuyers have credit scores below 600.
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Whats Considered A Poor Credit Score
Quicken Loans requires a fair score of 620 or higher while United Wholesale Mortgage needs you to have at least a fair score of 640 to qualify for conventional mortgages.
But what exactly is a fair credit score?
The average score was 711 and the bare minimum to be considered fair was 580, according to credit rating company Experian.
Experian also reported that 46% of Americans have very good to exceptional ratings , while 16% have very poor scores . Lenders tend to be wary of the latter because they are more likely to default.
How To Shop For Bad Credit Refinancing Companies
Shopping around for bad credit mortgage refinance companies will give you a better idea about your options so you can make informed decision. Here is a checklist to keep in mind:
- Get a mortgage credit report first and look for red flags or errors impacting your scores.
- There are several home value estimator tools online to check the current market value of your home, so use of them to get an idea.
- Few banks will come forward to refinance your mortgage if you owe more on it than it is worth. Banks issue loans based on market value of your property, and without your own money invested, the investment for a third party is risky. While you are calculating the market value of your home, make sure you conduct research as different banks require varied amounts of equity.
- Make sure you provide the same financial information to all refinance lenders for accurate loan estimates.
- Dont hide any major credit issues such as history of late payments, bankruptcies, or foreclosures.
- Get all of your price quotes on the same day when possible.
- Once you choose a lender, it is imperative to get a written rate lock confirmation.
Remember the first couple of steps are crucial in order to get an accurate rate quote from a refinance lender that specializes in bad credit. Start with your current mortgage company and have them pull your credit score so you know where you stand. The reason you should know your homes current market value is it is needed for a cash-out refinance.
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Other Factors That Mortgage Lenders Consider
Lenders consider other factors beyond your credit score when you apply for a mortgage.
- Down payment amount A down payment is the part of your homes purchase price that you pay upfront. The more money you put down, the less youll have to borrow, so you may get a lower interest rate and lower mortgage payments.
- Debt-to-income ratio Your DTI ratio is your monthly debt payments divided by your gross monthly income. While requirements depend on the mortgage you apply for, a DTI of less than 50% is ideal.
- Assets and income Lenders look at your income and assets to figure out whether you can afford a mortgage. If you cant show that you have the resources to cover your monthly payments, you may not get approved.
- Length of work history Youll likely need at least two years worth of work history. This can be a challenge if you recently started a business or changed jobs before or while you applied for a home loan.
- Cosigners If you have bad credit, you may need a cosigner to get approved for a home loan. A cosigner will be responsible for paying your mortgage if you default.
How Do Bad Credit Mortgages Work
Bad credit mortgages work like any other mortgage, except that they accept people who had problems paying their debts in the past. For this reason, the terms of the mortgage will probably be less favourable than theyâd be for someone with a better credit score.
First and foremost, your interest rate will probably be at the higher end of the spectrum. This is to offset the higher risk you pose to lenders.
Youâll probably also be asked to put up a higher deposit than with a conventional mortgage. While itâs possible to take out a mortgage with as little as a 5% deposit if you have good credit, subprime lenders require 15% and upwards.
You may be able to apply for one of the governmentâs help to buy schemes in order to put your deposit together. These schemes make getting a mortgage easier by allowing you to borrow up to 20% of the purchase price interest-free for five years.
However, you wonât qualify for a help to buy scheme if youâve been declared bankrupt in the past six years.
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