Being approved for a house loan with poor credit can be daunting, but that doesn’t have to stop your aspirations of homeownership!
Home loans for people with bad credit can be obtained from both government-backed lenders and private lenders. Research the options and find the one that works best for you in your individual situation.
Government-backed loans
If you need a home loan that won’t require a large down payment or have poor credit, government-backed loans might be your best bet. These mortgages are insured by the federal government, reducing risk to lenders and making them easier to qualify for.
For instance, FHA and VA offer loans that are insured by the federal government, meaning if you default on your mortgage, they will step in to cover its losses. Furthermore, these types of mortgages tend to be more accessible than conventional home loans since there are fewer qualifying criteria and longer repayment terms available.
Another type of government-backed loan is the USDA loan, designed for people living in rural areas. While these loans don’t require a down payment, you must have a credit score of at least 640 to qualify. You can check if your property qualifies for a USDA loan by visiting their website.
Conventional loans
If you’re in the market for a home, conventional mortgages are one of your available options. These loans are backed by private lenders and regulated by Fannie Mae and Freddie Mac, respectively.
The interest rate on a conventional mortgage is determined by your credit score, down payment amount and income level. Additionally, it’s affected by the type of mortgage and loan repayment terms.
Conventional loans can be divided into conforming and nonconforming mortgages, depending on whether they adhere to Fannie Mae and Freddie Mac guidelines.
In general, conventional mortgages feature either a fixed or adjustable interest rate and require monthly principal and interest payments. With an adjustable-rate mortgage, however, the interest rate can change according to market conditions.
Conventional mortgages typically require a down payment of between 5%-20% of the purchase price. Making this down payment allows you to qualify for the lowest possible interest rate on your mortgage, while also saving money in the long run by forgoing private mortgage insurance (PMI), which can be costly in the long run.
Private mortgage insurance
If you have bad credit and can’t put down a 20% down payment on your mortgage, your lender is likely going to require that you purchase private mortgage insurance (PMI). This type of policy safeguards the lender in case of default on your loan.
PMI (private mortgage insurance) is an additional fee added to your regular mortgage payments that must be maintained until you reach 22% equity in your home – at which point the lender will cease charging you for premiums.
Private mortgage insurance (PMI) may add an extra expense, but it can help you gain ownership sooner. That is why it is critical to understand what PMI is, if you need it and how much it costs.
Your credit score is essential when applying for a mortgage, so be sure to shop around and compare offers before selecting one. A good score could save you thousands in interest on the loan.
Cosigners
When your credit is poor, a cosigner can be an effective solution to getting approved for a house loan. However, be wary of potential risks, particularly if your relationship with your cosigner is tenuous or you lack an emergency plan in case of nonpayment of payments.
Mortgage cosigners are individuals who provide financial security to the primary borrower in case there are any issues with their loan. Unlike guarantors, who typically only need payment when the borrower defaults, cosigners assume full responsibility from day one.
Before accepting the mortgage application, the lender will check the cosigner’s credit. They may also demand copies of identifying documents and financial records.
