My credit is ... not the best. How am I going to qualify for a home loan?
- Posted: January 8, 2020
- By: Nations Lending
Qualifying for a mortgage has become increasingly difficult since the housing bubble burst in 2008. This is especially true if your credit history is a bit rocky. Luckily, a less than stellar credit history doesn’t automatically disqualify you from the buying a home. There are bad credit home loans available.
Home Loans For the Credit Challenged
There are legitimate loan options for people with less than stellar credit. The FHA loan program is designed to assist borrowers with lower credit scores. The minimum allowable credit score is 500. Borrowers with credit scores between 500 and 579 are eligible for FHA financing with a maximum loan-to-value of 90%, which means a 10% down payment is required. These loans are also subject to more restrictive qualifying ratios, including a 31% limit on housing expense and a 43% limit on total debt. Borrowers with credit scores of 580 or higher may qualify for financing up to 96.5% LTV, requiring only a 3.5% down payment. FHA loans also require mortgage insurance premiums (MIP), which differ from the private mortgage insurance (PMI) used in conventional loans. For FHA loans with case numbers assigned on or after June 3, 2013, MIP is required for the life of the loan(not to exceed 30 years) if the original LTV is greater than 90%. If the original LTV is 90% or less, MIP is required for 11 years. Unlike PMI on conventional loans, FHA MIP typically cannot be canceled simply by reaching 20% equity.
This loan may also have a higher interest rate, as the interest rate you receive is a reflection of your credit standing. Looser credit standards for FHA loans may also mean that bankruptcies, repossessions and foreclosures may be overlooked if certain conditions are met and enough time has elapsed since their occurrences.
If your credit is still keeping you from qualifying for a mortgage, these steps will help you work towards home ownership.
Check your credit reports for negative credit entries
While some mortgage programs allow you to purchase a home if you have bad credit, a credit score alone doesn’t guarantee approval. Some of the most serious credit entries that can keep you from buying a home include:
• Bankruptcy
• Foreclosure
• Liens
• Repossessions
• Accounts in collections
• Past due accounts
You can order your credit reports for free from AnnualCreditReport.com once per year. Consumers are eligible to receive a report for each of the three credit reporting agencies: Equifax, Experian, and TransUnion. This website is the only government-approved source for credit reports, so do not be fooled by similar sites that promise free reports.
Go over your reports carefully and find out what is keeping your score down. From there, you can take steps to repair your credit somewhat so that you can qualify for bad credit home loans.
Dispute inaccurate information
An estimated 25 percent of credit reports contain major errors. If your credit report has inaccurate information, open a dispute with each of the three credit reporting agencies: Experian, Equifax, and TransUnion. You can do this on each agency’s website or by mail.
By law, inaccurate information must be removed in a timely matter. This incorrect information can prevent applicants from being approved for even bad credit home loans and could leave them holding the bill on higher interest rates if they are approved.
Bring and keep accounts current.
If you have past due accounts or accounts in collections, bring them current. Contact your creditors and set up payment plans if necessary. Once your accounts are current, it’s crucial that you pay your bills on time every month. The longer you consistently pay your bills on time, the higher your score will climb.
Think Better, Not Perfect
Bad credit doesn’t mean you have to give up the dream to buy a home. As you explore your options and work towards repairing your credit, you’ll find that owning a home is well within reach. Bad credit home loans are designed for folks who have imperfect credit, so your credit does not need to be perfect. However, getting your credit in better shape will get you a better interest rate and increase your chances of approval when you apply for a mortgage.