While a high credit score is a definite plus when trying to purchase a home, it is not impossible to get a home loan with bad credit. In fact, there are a couple of different options available.
For the best results, give yourself a couple of years to repair before seeking a home loan if your credit is less than stellar. Following are some options for landing a mortgage with a low credit score.
Increase Your Down Payment
Save as much as possible for as long as possible in an effort to build up your down payment. The higher down payment you have available, the more favorably lenders will look on you regardless of your credit score.
Not only will you have to borrow less, but you will be able to show your ability to save and provide for the home as much as possible on your own. Some options for building a down payment faster include saving tax refunds, selling items in garage sales, and selling big ticket items such as boats and even second vehicles.
Inquire about an FHA Loan
While these loans do require credit scores, lenders are actually more concerned with credit history. Therefore, even if a major event such as a bankruptcy or a foreclosure is bringing down your score, you still have a chance.
Do note that those that have had a home foreclosed on during the past three years are not eligible for an FHA loan. While the FHA may offer exceptions to those who suffered a foreclosure due to extenuating circumstances, this is the exception not the rule.
After the three years, even if the credit score is poor, a two year history of paying obligations consistently and on time could prevent potential borrowers from being denied due to a low credit score.
Start now paying all obligations, whether debt or regular expenses, on time so that you can have this strong credit history on your side.
A Sub-prime Mortgage: The Last Option
If there is no time to increase a down payment or build a strong two year credit history, or if you are still getting denied, a sub-prime mortgage may be the only option. Though it is a legitimate option, it is far from the best option if it can be avoided.
They reason is that, due to the high risk nature of lending to someone with poor credit, these loans come with a hefty interest rate. Still, in the case of no other opportunities available, many find it is better than nothing.
In the end, no one really wants to have to deal with finding a bad credit home loan. The ideal situation is to have a great credit score and land a low interest mortgage. This is not an option for many however, and for those that do fall into the category of bad credit, these suggestions could put you on the road to owning your own home despite a low credit score.