How to get a home loan with bad or low credit

You may have found your dream home, saved up for a down payment and budgeted to ensure you can afford the mortgage payment. However, your credit is less than perfect.

You still have options. Find out how your credit affects your borrowing power and learn about some of the home loans you can get with a lower credit score.

What do mortgage lenders consider a bad or low credit score

According to CNBC, mortgage lenders typically consider a credit score of 580 or less as “poor” when it comes to qualifying for a conventional mortgageCNBC-select. However, what constitutes a bad credit score can vary slightly depending on the type of loan and the specific lender’s criteria.

Beyond the numerical score, mortgage providers also consider your credit history (including payment history), the amount of debt you owe and the length of your credit accounts. Lenders also assess your income, employment stability and debt-to-income ratio to gauge your ability to repay the loan, which could influence their decision even if your credit score is low.

Can you buy a house with bad credit?

Yes, you may be able to buy a house with low credit. However, lenders may see borrowers with bad credit as higher risk, so they typically charge higher interest rates to compensate. Luckily, there are several government-backed loans available to first-time homebuyers and prospective homebuyers such as Federal Housing Administration (FHA), Veterans Affairs (VA) and United States Department of Agriculture (USDA). Please note that Chase does not offer USDA loans.

Having a significant amount of cash for a down payment can help mitigate the risk for mortgage lenders. A sizeable down payment reduces the loan-to-value ratio (LTV), making you a less risky borrower.  While saving for a larger down payment can help, working on improving your credit score in the months leading up to your application could lead to better loan terms and increase your chances of approval.

Home loans for bad credit

If you have a lower credit score, you may not qualify for a Conventional home loan. Instead, you might need to consider one of these mortgage options.

FHA loans

The minimum down payment for an FHA loan is 3.5% of the purchase price. Some lenders may offer FHA loans with a score of at least 500 with a downpayment of 10%. FHA does not offer loans if your score is less than 500, but if you do not have an established score, you may still be able to qualify for the 3.5% down payment if you have sufficient non-traditional credit.

To help offset the risk that borrowers with low credit scores can bring, FHA loans require an upfront mortgage insurance premium (UFMIP). The upfront MIP is 1.75% of the loan amount, while the annual MIP is between 0.45% and 1.05% of the average remaining mortgage balance and is included with your monthly mortgage payment. Contact your Home Lending Advisor for current information.

VA loans

If you’re an active, detached, retired and/or disabled member of the military, including the National Guard or Reserves, you could qualify for VA loan. VA loans generally don’t require a down payment.

Like FHA loans, VA loans come with additional fees. Most borrowers must pay a one-time funding fee, between 1.25% and 3.3% of the loan amount. Check with your HLA for up-to-date information. Borrowers who make larger down payments and who are applying for their first VA loan typically pay the lowest funding fees.

Grant programs

Many state, county and city government agencies offer grants, vouchers and other programs to assist borrowers with low credit scores. Check for local mortgage grants and housing assistance programs in your area.

Conventional loans

Conventional loans can be challenging to secure with poor credit due to various stringent requirements such as:

• Higher minimum threshold: Conventional loans usually require a higher credit score compared to government-backed loans. Many mortgage providers set the minimum credit score for conventional loans around 620-640. If your credit score falls below this range, you may find it difficult to qualify.
• Credit history: Conventional loans typically prefer a clean credit history with fewer negative marks such as late payments, foreclosures or bankruptcies.
• Impact on loan terms: Even if you qualify for a conventional loan, a lower credit score can result in less favorable loan terms, such as higher interest rates. This means higher monthly payments and increased overall loan costs.

What other factors do lenders review?

Your credit score is an important part of your loan application, but it isn’t the only factor that lenders consider. They also review:

• Income and debts: Most conventional lenders require a debt-to-income (DTI) of 43% or less. To determine your DTI, lenders divide your mortgage payment and recurring monthly debts by your monthly pretax income.
• Down payment: The larger your down payment, the better chance a lender will consider your application. While there are low down payment options, at least a 20% down payment will also help you avoid paying private mortgage insurance on conventional loans. You can calculate this percentage by dividing your down payment by the lesser of the appraised value or purchase price.
• Assets: In some cases, lenders require you to have assets in reserve after closing on your loan so you can continue making your monthly mortgage payments. Most bank accounts, stocks and bonds count as assets.
• Work history: Most lenders prefer borrowers with steady employment. They may require you to have been in your current job or in your current job field for at least two years.

What to consider when buying a house with bad credit

If you do apply for a home loan with a lower credit score, make sure you consider these factors:

• You won’t permanently damage your credit score. A home loan application shows a hard credit pull on your credit report. This credit pull may affect your credit score.
• You can lock in a low interest rate. If you want to buy a house when interest rates are particularly low, acting sooner rather than later may be a smart idea. Waiting longer to apply could mean getting a loan when interest rates and monthly payments are higher.
• You may need a large down payment. To offset your credit score, lenders may require compensating factors such as a down payment of 20% or more of the purchase price.
• Your lender may have stricter income or asset requirements. To make up for a low credit score, your lender may require a lower DTI ratio or significant assets in reserve.
• You may end up spending more. Some low-credit score loan options require high upfront or annual payments, which can increase the cost of buying a house.

Tips to get a mortgage with bad credit

Here’s a step-by-step guide to help you navigate the process of getting a mortgage with bad credit:

• Obtain your credit report: Get a copy of your credit report from all three major credit bureaus. Correct any inaccuracies in your credit report by disputing them with the credit bureaus.
• Make debt payments: Focus on reducing high credit card balances and paying off outstanding debts to improve your credit score. Ensure all bills and existing loans are paid on time to build a positive payment history.
• Increase savings: Budget wisely by setting aside funds specifically for your down payment to strengthen your mortgage loan application. Having a larger down payment reduces your LTV ratio, which can make you less risky to loan providers.
• Consider alternative options: Look into FHA loans, which have lower credit score requirements (generally a minimum score of 580 for a 3.5% down payment). You can explore VA loans, which have no minimum credit score requirement, but lenders generally prefer a score of 620 or higher.
• Explore lenders specializing in bad credit: Some loan providers specialize in working with borrowers with bad credit. Research lenders who are known for their flexible credit policies. Get quotes from multiple lenders to compare terms and interest rates.
• Consider a co-signer: A co-signer with good credit can help improve your chances of approval and potentially secure better terms. Ensure the co-signer understands their financial responsibility.
• Prepare for higher costs: Higher interest rates and additional fees may apply. Adjust your budget accordingly to accommodate these added costs.

In summary

Securing a home loan with poor credit may seem challenging, but it’s achievable with the right strategies and determination. By focusing on improving your credit, saving for a larger down payment and exploring alternative loan options, you can enhance your chances of approval. Remember, there are lenders that specialize in bad credit home loans and offer mortgage loans to borrowers with poor credit. Working with a Home Lending Advisor can provide valuable support and help you streamline the path to homeownership, turning your dream of owning a home into a reality.