Buying a home can be one of the most rewarding experiences you’ll ever have. But, it’s also among the most stressful processes to go through if you don’t have enough money saved up, excellent credit, and a solid income. If your credit score is low, you may be concerned about how to qualify for a home purchase. Indeed, some mortgage lenders will not work with borrowers who have scores below 620.
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However, there are still options for those who need help buying a house. Luckily, there are ways to get into a home with bad credit or no money. Whether you’re looking to buy your first place or refinance an existing mortgage, here are some tips for qualifying for a home purchase with bad credit and no down payment.
What Is a Good Credit Score?
You can check your credit score on several websites, including Credit Karma, WalletHub, and MyFico.com, among several others. A good/acceptable credit score is any score above 650. A score above 700 is excellent. A score below 600 is considered poor or subprime.
The average American FICO score is 699, according to Experian’s State of the Credit report for the first quarter of 2018. But the range varies widely: The average FICO scores for Americans ranged from 592 (Nevada) to 722 (Minnesota).
Some options are if you have a relatively low credit score but still want to purchase a home. You may be able to get a mortgage with a lower interest rate than your credit score would otherwise qualify.
Tips To Qualify For a Home Purchase with a Low Credit Score
Home buying with a low credit score is possible. The key is to have a good down payment and solid employment history. The biggest problem for bad credit is getting approval for a mortgage loan. However, if you have a good income and savings, it can be easier to qualify for a loan. Here are valuable tips on how to get approval for a home purchase with a low FICO score:
Check Your Credit Report Regularly
The first step in being eligible for a mortgage with a low credit score is checking your credit status to ensure it’s accurate and up-to-date. You can order your credit report from each of the three major credit bureaus at least once per year — Experian, Equifax, and TransUnion — to monitor any changes or errors. If any discrepancies show up on one report but not another, contact the company to get them resolved immediately so your score doesn’t drop further.
Know Your Finances
The best way to ensure eligibility for a mortgage with poor credit is to get your finances in order and maintain good financial habits. Before looking for a new home, know your monthly budget to identify how much house you can afford. Try not to focus on the idea that bigger is better; instead, focus on what type of home will fit your lifestyle best while still being within your means.
Have a steady income
If you’re self-employed, your business should be stable and profitable enough to pay back the loan. Your income must be more than what it takes to cover living expenses and other debts you may have for the lender to approve your application.
You must have enough income to cover the expenses of owning a home. This includes paying the mortgage, property taxes, insurance, and other monthly fees such as maintenance and utilities. Your lender will probably ask for several years of tax returns and bank statements so they can verify this information for themselves.
You should be capable of affording the payment on the loan. Your monthly house costs (including principal, interest, taxes, and insurance) shouldn’t account for more than 28% of your gross monthly income. For example, if your income is $2,500 per month, your total monthly housing costs shouldn’t exceed $650 per month – or about $85 per week.
Save money
This is the number one tip for qualifying for home purchases with poor credit scores. You need at least 20 percent of the purchase price in cash or liquid assets to qualify for most mortgages these days.
If you do not have enough savings, being approved for financing may be difficult or impossible without help from family members or friends who can act as guarantors on your loan application.
Your debt ratio should be under 50%
Your debt-to-income (DTI) ratio is a figure that rates your financial health by comparing your monthly debt payments to your gross monthly income. Lenders use the DTI ratio to determine whether you’re prepared to make a mortgage payment, and lenders also use DTI to assess how much risk you pose. When applying for a mortgage, you must have a healthy DTI and learn how DTI affects your loan eligibility.
This means that your monthly debt payments are less than 50% of your income every month after tax deductions have been made. If all of your monthly debt payments add up to more than 50% of your monthly income, then this is not an option for you at this time because it would mean that if something were to happen where
You must have adequate income left over after paying for housing costs to pay for other expenses. For example, if your rent is $850 per month, you only earn $1,200 per month from employment and other sources of income (including bonuses). You may not qualify for an FHA-insured loan because there’s no way to get by financially without falling behind on other bills or getting overdrawn at an ATM).
Get Preapproved for a Mortgage Loan
Getting preapproved for a mortgage loan means that your lender has evaluated your financial situation and determined that you are eligible for a loan based on the information provided by you and your current financial situation (including any debt).
This evaluation can include looking at your income, assets, and liabilities and the amount of money you want to borrow from the lender (called the “loan amount”).
If you have decided on a home, get preapproved for financing before you start shopping for homes. Preapproval means that the lender has reviewed your financial situation and determined that you can afford the home based on their criteria — such as income, debt, and assets.
You don’t need to provide proof of funds; instead, you’ll submit information about your income and assets so that the lender can estimate what size of mortgage loan they might approve if they underwrite you today (based on their current standards). Once approved, you’ll have proof that you have enough money saved up for down payment and closing costs — which will reassure sellers when it comes time.
Homeownership Experience
Homeownership experience is one of the most critical qualifications for getting approved for a mortgage loan with bad credit. Lenders are more inclined to accept applicants who have owned homes before than those who have never owned one before.
If you had owned a home before but lost it due to foreclosure or short sale, try applying again as soon as possible. This shows lenders that you know how important homeownership is and how much effort it takes to maintain it properly without any issues arising.
Use Your Savings
If you have savings, it can help offset that you have less than stellar credit. Alternatively, consider getting a personal loan to put down more than 20 % on your home purchase (which typically means lower interest rates).
Get a cosigner
If you do not have enough savings but have a high income, consider getting someone else to co-sign on your loan application. If your credit is low, you can use someone who has good credit to co-sign the loan. This person will ensure that you make all the payments on time and take care of any problems that come up during the life of the loan.
A cosigner will guarantee that they will pay off any debts you cannot afford if something goes wrong with your finances after closing the property. Be prepared to pay extra money if your cosigner withdraws from the deal at any point because this will likely lower their credit score and make it harder for them to get approved as well.
Get Onboard With a Good Lender
There are plenty of mortgage lenders who will work with borrowers who have bad credit scores. The key is finding a suitable option — especially if you don’t have adequate savings for a down payment or closing costs — and getting preapproved by them before shopping around for homes (or at least knowing what type of home loans they offer).
Typically, you should ensure you’re using all three major credit bureaus— Equifax, TransUnion, and Experian — each has different criteria for deciding whether you should receive their highest or lowest scores. For example, if you have one delinquent account on your report at Experian, but it’s paid off with no collection activity and no late payments on any other accounts, they may give you an excellent score.
That same delinquent account might not show up on TransUnion or Equifax because it’s old enough that it has fallen off your report by their reporting period. So, make sure you check all three reports before applying for a mortgage or considering refinancing options.
What Are The Available Loan Options For Low Credit Scores?
If you have a low credit score, you will have more difficulty qualifying for a home loan. However, there are several unique loan options for you.
FHA Loans
The Federal Housing Administration (FHA) offers mortgage insurance on loans made by private lenders. The FHA insures mortgages that private lenders make to individuals that may not be able to get financing elsewhere. FHA loans are simply mortgages insured by the Federal Housing Administration, a part of the Department of Housing and Urban Development (HUD).
Their loans represent an opportunity for people with low credit scores to become homeowners faster than they could use other options available through traditional financial institutions.
If you have a low credit score, a Federal Housing Administration (FHA) loan is one of the best options. The FHA insures mortgages up to 97% of the home’s value and requires a down payment of 3.5%. They also allow borrowers with credit scores as low as 580 to qualify for loans through their program. The government insures the Federal Housing Administration sets FHA loans and their terms. This means that mortgages are insured up to 97% of the home’s value and require a down payment of only 3.5%.
Qualification requirements for an FHA loan
You must have a 640 or higher FICO score (this is the most recent version of this score). If you don’t yet have a FICO score, you can check it for free on Credit Sesame or get it from your lender before applying for a mortgage (you should have one anyway).
Your credit report must show no more than one 30-day late payment within the last year and no more than two 60-day late payments in the past 24 months to get an FHA loan. You must also have two years of continuous employment with the same employer. The lender will look at how long you’ve been working at your current employer so that they can determine whether you have enough income to make your monthly mortgage payments on time each month.
VA Loans
The Veterans Affairs (VA) home loan program is designed to help eligible borrowers purchase a home. These loans are guaranteed by the Veterans Affairs US Department and require no down payment from the borrower (though some sellers do require one). With a VA-guaranteed mortgage, the VA guarantees that it will reimburse the lender for losses up to 25 percent of the mortgage amount in most cases.
Borrowers can purchase a home with no down payment by qualifying based on their income level and credit score. In many situations, the seller will even pay for closing costs and points on the loan.
Borrowers must qualify based on their income level and credit score, with a minimum score of 620 needed to qualify for most VA loans. This is one of the best advantages of VA loans, but there are some additional benefits.
Qualification requirements for an VA loan
VA loans have slightly different requirements for borrowers with bad credit than FHA loans. To qualify for this loan, you must have been discharged from active service within 12 months of applying for the loan and received an honorable discharge from military service within 24 months (or if discharged for a service-connected disability).
You cannot have declared bankruptcy within three years before applying for a VA loan or had any judgments or liens against you within 365 days.
USDA Loans
The United States Department of Agriculture (USDA) has several programs that offer lower interest rates than conventional loans. Still, they also have strict income and credit scores requirements that must be met before they approve an application. For example, if your household income is less than $80,000 per year and your credit score is at least 640, you may qualify for one of their programs.
Conventional mortgages
Conventional mortgages still represent the majority of home loans issued today, and most lenders allow scores as low as 620 to qualify for them. Lenders consider these scores “subprime.” however, they will still lend money at higher rates than prime borrowers pay because they know that there is risk involved in lending money to someone with a poor credit history or who has recently filed bankruptcy and is facing foreclosure proceedings.
Choose a home mortgage loan option that fits your needs
Once you’ve found a suitable lender and loan, it’s time to choose which type of mortgage best suits your needs: fixed-rate or adjustable-rate mortgages (ARMs). A fixed-rate mortgage interest rate usually remains the same for the entire loan term. An ARM will have an initial period when the rate is fixed; it’ll vary according to an index once that’s up.
Summary
It cannot be easy to be approved for a mortgage loan when you have a low credit score. A low credit score indicates problems paying your bills or being delinquent on your payments. When this happens, it becomes harder to be approved for a mortgage loan, and you may need to check other types of financing options.
A good credit score isn’t the only way to qualify for a mortgage. You can get mortgage loans with bad credit or no credit. The key is finding a lender that will work with you on your financial situation and provide options to get your loan approved. Many factors help determine your eligibility, and having good credit is just one of them; with these few tips and options, nothing stops you from owning your dream house.