If you have a low credit score, you may find it difficult to qualify for a home loan. However, there are several programs for buyers with less than perfect credit that will help you to achieve your homeownership goal. Depending on your situation, you might also want to look into home equity loans.
The most common type of home loan for bad credit is an FHA mortgage. You can get an FHA loan with a score as low as 500, and with a down payment of just 3.5%. These loans are typically the most affordable option for first-time home buyers. Moreover, FHA loans are less risky for lenders.
Other types of loans available for bad credit include non-qualified and subprime. Non-qualified loans tend to have higher interest rates than government-backed loans, and they are often offered by private lenders. Borrowers with a score as low as 500 might have a hard time getting approved.
One program that can be helpful for borrowers with lower scores is Freddie Mac’s Home Possible. It allows a down payment of as little as 3 percent, and it includes down payment assistance programs for lower income borrowers.
Another program for people with bad credit is the HomeReady program from Fannie Mae. This is a standardized home loan that allows borrowers with low to moderate incomes to purchase a home. A 620 credit score is needed, and 3% of the total mortgage balance must be paid down. Unlike traditional mortgages, the HomeReady program does not require you to be a first-time buyer.
Another option for borrowers with lower credit is the USDA mortgage. Those with scores as low as 600 can qualify for this program, and the down payment requirements are generally lower than for conventional loans. But, the downside of this program is that it is only available through certain lenders. Likewise, borrowers who have a lot of equity in their home might be able to qualify for this program, but they may have to pay for mortgage insurance.
Finally, if you have a high credit score, you may be able to qualify for a VA loan. Those with high credit scores will have to pay slightly higher rates, but they can still qualify for this type of loan. There are, however, some exceptions.
Although the minimum credit score required to buy a house is usually 500, you may be able to get approval for a FICO score as low as 510. Exceptions may be made for borrowers with lots of equity in their homes, or those who have a low debt-to-income ratio.
Regardless of your financial situation, you should take the time to research the best mortgage for you. By making sure that your credit is in good shape, you can avoid paying expensive interest rates and closing costs. At the same time, you can improve your credit so that it is more likely to be approved the next time you apply for a home loan.