Owning a home is a classic staple of the American dream, but it often seems like only those with excellent credit can become homeowners. However, that is no longer the case. The government has put programs in place to help those with bad credit get access to mortgages, and there are other organizations that offer ways to get a mortgage despite a low credit score.
For reference, a credit score below 650 is considered “fair,” and anything below 600 is considered “poor” or “bad” to most mortgage lenders. A credit score with any of these three ratings is low enough to take the options below into consideration.
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These mortgages are sometimes referred to as “bad credit mortgages,” and often come with higher interest rates than conventional mortgages. Because of a low credit score, lenders have to plan for a higher-than-average chance that the loan could be defaulted on, so they adjust interest rates upwards accordingly. Other factors besides your score play into just how high the interest rates will be, however. Lenders also look at the types of delinquencies on your credit report, such as missed bill payments versus auto loan defaults, as well as the amount you are able to put up as a down payment.
This tends to be a last-ditch option for most borrowers, though. If possible, it is best to wait and build up a better credit score before seeking out a sub-prime mortgage. For those who need a mortgage but cannot wait, sub-prime mortgages may be the way to go.
The VA Loan
While this program is only available to active members of the United States military and those who have previously served, it is an option to keep in mind if you qualify. This program was made available under the G.I. Bill and offers veterans and active service members several perks.
One of the biggest cost-saving perks of a VA loan is the waiver of private mortgage insurance. Conventional mortgages require borrowers to purchase PMI as a safeguard to the lenders, but this is not necessary with VA loans. Another attractive benefit to these loans is the ability to finance up to 100 percent of the cost of a home. This is extremely beneficial for veterans who may not have a lot of money saved up, because they are not required to make a down payment.
Additionally, the qualification standards for these loans are far more laid-back than conventional mortgages. For example, there is no minimum income requirement and no minimum credit score necessary for approval. For veterans and current military personnel with bad credit or no credit, this benefit alone often makes home ownership possible. Because credit scores are not factored into the terms of the mortgage, this also means you will pay much lower interest rates, which can save you a lot of money in the long run, especially if your credit score is low.
Federal Housing Administration Loans
FHA loans have become increasingly popular since the recession hit a few years back. The Federal Housing Administration is an extension of the Department of Housing and Urban Development that offers several types of special loans for those with bad credit. As FHA loans are insured by the federal government, it is possible to qualify for one despite bad credit, bankruptcy or low income. What follows are a few examples of this type of loan.
This loan, commonly referred to as the 203(b) home loan, allows borrowers to finance up to 97 percent of their loan and allows the entire amount of the closing costs to be covered by a charity or government organization. In addition, the insurance on these loans is less than half the cost of insurance on a conventional loan.
The FHA does conduct a state-specific debt ratio check, but this is a safeguard to borrowers and not a deciding factor of eligibility.
Adjustable Rate Mortgages
FHA ARMs, or Section 251s, are ideal for low-income families with bad credit. They keep initial mortgage rates down and keep payments to a minimum. One benefit of this loan is the assurance that your mortgage rate cannot rise over 1 percent in a calendar year, and over 5 percent for the duration of the loan. Once better credit has been established, borrowers are also able to easily refinance this loan for a better rate. The same rules for closing costs and down payments for 203(b) loans apply to this loan.
Energy Efficient Mortgage Loan
This program combines all of the perks of a 203(b) loan with the additional benefits of rolling certain costs into the life of the mortgage. The program allows potential homeowners to finance the costs of many high-dollar, energy-saving remodeling projects as a part of their low-interest, low-payment loan. This means that those with bad credit who qualify can make energy-efficient improvements to their new home without worrying about the up-front costs. Taking advantage of this FHA Energy Efficient Mortgage will also help drastically lower utility bills, which means more timely bill payments that will improve your credit score.
These are just a few of the many loan types the FHA offers. Potential borrowers should be aware, however, that a credit score below 580 will usually disqualify them from the 3.5 percent down payment option. Those below that threshold will typically be responsible for paying up to 10 percent down on their mortgage.
The Making Home Affordable © Program
This initiative is part of the administration of Obama. The aim is to make the housing market stable and assist current homeowners who may be in a bind. This program has been put in place to help those who have a mortgage currently to obtain lower payments and avoid having a foreclosure on their credit report, which could have a dramatic negative impact on their already lowered credit rating. While this program does not assist those looking for a first-time mortgage, it is a great asset to those looking to get a second mortgage or refinance their primary mortgage despite bad credit or lowered income.