How To Get Approved For A Home Loan with Bad Credit
The homeownership journey can be challenging, especially if you’re not adequately prepared. Since buying a new home requires a huge amount of money, people tend to look for alternative financing options, including applying for a mortgage loan. Some home loans come at higher interest rates and strict terms, making them difficult to qualify for, especially if you don’t meet certain requirements, including the required credit score, DTI ratio, and down payment. If you’ve got bad credit, you’ll have limited chances of qualifying for a home loan. However, this doesn’t mean that you can’t qualify entirely. There are some lenders who offer home loans to people with bad credit, typically lower than 580. You need to research and compare multiple home loan lenders to get the best deal in terms of lower interest rates. You should also expect to pay higher interest rates since lenders will try as much as possible to reduce the risk involved. You should also be prepared to pay the loan for a much shorter duration.
What’s the minimum credit score to qualify for a home loan?
Generally, there’s no threshold for qualifying for a home loan with bad credit. However, if your credit score is low, it becomes challenging for your home loan to be approved by lenders. If you’ve decided to go for the conventional conforming home loans, most lenders require a credit score of at least 620. On the other hand, most government-backed loans offer more flexible home loans, even for those with extremely low credit ratings. These loans are accompanied by high-interest rates and down payments. You can check your credit score with one of the credit bureaus, i.e., Transunion, Equifax, and Experian.
How to get approved for a home loan with bad credit
A credit score of 580 or less will make it challenging for your home loan to be approved. However, you can take some steps to repair your credit, although this might not work for you since negative listings remain on the credit report for seven years. There are some things that you can do to boost your chances of your home loan being approved. The first step is to ask for your credit report and check for possible errors. Below are top tips to follow for your bad credit home loan to be approved:
1. Consider low credit score home loans
There are several low credit score home loans guaranteed by the government that can help people with bad credit in getting financing for their homeownership journeys. Prior to the introduction of such programs, people who could afford homes were those with significant income that would guarantee to pay the required down payment to acquire a property. Some federal government agencies that help people with bad credit get home loans include FHA, USDA, VA, and some local agencies. These agencies guarantee the borrower that they’re obligated to pay for the loan if the borrower defaults. First, FHA home loans have helped people get homes even with low credit scores. The down payment required is also relatively lower than in conventional home loans. To qualify for an FHA loan, you’ll need a credit score of as low as 500 and a down payment of 10%. If it happens that your credit score is 580, you’ll only pay a down payment of 3.5%. On the other, one can consider getting VA loans even with low credit. The best thing about VA loans is that you don’t need to make any down payment. Lastly, USDA home loans have also helped people acquire properties in rural areas. These home loans don’t have any minimum credit score and down payment requirements.
2. Select the best lender
Most lenders have guidelines explaining the conditions borrowers must meet to qualify for a home loan. Therefore, it’s essential to compare a number of lenders and see what kind of home loans they offer together with their interest rates and down payment requirements. In your search for the right lender, it might be quite amazing to find some who are willing to give you a home loan even with your low credit rating. You should perform proper background research on the lender before applying for a mortgage loan with them.
3. Check for errors in your credit report
Sometimes, your low credit score might result from errors or inaccurate information, making it difficult for your home loan to be approved. Therefore, it’s essential to ask for your credit report from all the credit bureaus and compare them. Analyze all entries in the report and find out whether they’re correct. If you come across any errors, missing or inaccurate information, you can dispute them and ask for correction. It’s essential to note that previous payments you’ve made account for around 35% of the credit score. Therefore, your primary focus should be on the payments you made.
4. Improve your home loan approval chances
There are various strategies to help you improve the chances of your home loan being approved by the lender, including reducing DTI, lowering debts, raising your down payment, etc. A lower credit score will possibly reduce the chances of your loan being approved since it’s the main tool lenders use to ascertain the borrower’s creditworthiness. Typically, it’ll take a while before you can actually improve your credit score completely. However, there are some immediate measures that can help you improve your chance of qualifying for a home loan. First, you can try as much as possible to increase your down payment. For instance, if you manage to make a 40% down payment, lenders won’t be too strict in approving your loan since the risk will have reduced significantly. Secondly, you can also pay off some of your current debts to lower your DTI ratio and improve your chances of your loan getting approved. Having a high DTI ratio will signify your inability to repay your loan. You can also find a co-signer to help you in your application process.
5. Find a grant
Most agencies help people with bad credit acquire loans by providing a guarantee. However, there are few local and state assistance programs that assist people in making down payments. When you can make a huge down payment, you increase your chances of your loan getting approved. Such programs differ depending on one’s location or the provider agency.
In conclusion, these are the top tips to help you get a home loan with bad credit. Ensure you get a home loan that you can afford over the given duration.