Buying a home can seem out of reach for people with poor credit. Luckily, there are many lenders that cater to individuals with less than perfect credit. Although this may result in a higher interest rate, it can be a good opportunity to build your credit score.
There are several different types of bad credit mortgage loans available. FHA loans are the most common type. These require a down payment and are insured by the government. Typically, an applicant will need to have a credit score of at least 500 in order to qualify. Applicants with scores below 600 will be required to make a bigger down payment. However, some lenders will accept lower scores, as long as you can provide evidence of your income.
Other low credit score mortgages can also be a viable option. This type of loan can be used to purchase a new home or to refinance a current one. Because of the risk involved with the lending process, these types of loans are generally a little more expensive. In addition, you will need to pay for private mortgage insurance (PMI), which will be based on your DTI ratio.
The down payment on a home is another consideration. For example, if you are buying a $400,000 house, you would need to put down about 20%. You can also look into a home equity loan. A home equity loan can be a second mortgage, secured by the value of your home. If you have a low credit score, you may need to put a larger down payment, although this can be offset by the amount of equity in your home.
While there are different types of bad credit home loans, most require a minimum credit score of at least 600. Credit scores below this number are considered to be in poor credit. Depending on the lender, you may be required to make a larger down payment or pay a higher interest rate. As with any mortgage, you should shop around to find the best rate.
There are several ways to improve your credit. One of the most effective strategies is to pay your bills on time. It is also a good idea to avoid making any late payments. Another way to boost your score is to request that any black marks on your record be removed. By establishing a good payment history, you will increase your chances of securing a mortgage with bad credit.
The down payment can help you lower your debt to income ratio, which is a major factor in a mortgage approval. Ideally, your DTI should not exceed 43 percent of your gross monthly income.
Before you make your decision, consider whether you will be able to afford the down payment and whether your financial situation is stable. Purchasing a home with a low credit score can be a difficult, expensive undertaking. Consider getting help from a mortgage consultant to determine which loan program will work for your needs.