While it’s true that getting a home loan is harder when credit scores dip below established standards, it’s certainly not impossible. In fact, some programs and lenders go out of their way to help struggling would-be buyers obtain a home of their own. Buying that house of your dreams will take work and dedication on your part, along with some tips and tricks on how to prevail. Here’s a look at home loans for bad credit and how to end up with “keys in hand.”
Credit Scores and Why They Matter
When beginning the homebuying process, you’ll discover quickly that credit scores matter – a lot. But credit challenges can happen to anyone due to unexpected life changes, a handful of missed payments, or even just using your credit cards to the maximum available credit.
When it all gets tossed into the credit-score equation, you may fail to qualify for the home you want, or you could end up with higher interest rates and higher monthly payments.
Major credit events such as foreclosures, bankruptcies, tax liens and collection accounts can lower your score significantly, so you may have to wait until some time has passed between these events and your mortgage application. Depending on the loan program and the type of credit issue, this time period can be anywhere from 12 months to two or four years.
Loan Programs for Those With Lower Credit Scores
Though negative credit marks typically stay on your record for seven years (or up to 10 years for bankruptcies), they won’t necessarily keep you from getting a mortgage loan. Government or government-sponsored loans can get you into your own home with much lower scores and down payments than “standard” lenders.
These programs come from lenders associated with, or approved by, the Federal Housing Administration (FHA), Veteran’s Administration (VA), U.S. Department of Agriculture (USDA), Freddie Mac and Fanny Mae.
USDA loans for purchasing a home in a rural area allow scores as low as 581 for some buyers and 640 for others. Be sure to ask about these and other programs catering to credit-challenged buyers.
Improve Your Chances With These Simple Steps
Missed payments aren’t the only things that lower your scores – and fortunately, you can take proactive steps in other areas. Double up your savings efforts, since a larger down payment shows the lender that you have more “skin in the game.” Consider asking a family member to help bolster your down payment with gift money (not a loan, which would count against you). Keep a close eye on your credit report and immediately dispute inaccuracies.
If you have any missed payments on your record, make consistent on-time payments for at least six months. A major consideration in mortgage approval is your debt-to-income ratio (DTI), so focus on paying off debt and getting your DTI down to at least 43 percent.
To finally become a happy homeowner, keep your focus on knowledge, dedication, and persistence. Contact us today for more information and to start your journey toward homeownership.