The Mortgage Insider - Home Financing with Contemporary Mortgage

How to Get a Home Loan with a Less-Than-Perfect Credit Score

Many people think you need ‘perfect credit’ and a large down payment to get a home loan.

You don’t.

Today, there are programs for people with less than perfect credit and little money down.

While it helps to have good credit because you have more options, don’t let bad credit stop you from buying the home of your dreams.

What programs are available? Check out the list below.

FHA Loans

The FHA program is the best loan program for borrowers with ‘bad credit.’ All you need is a 580 credit score, which is almost 100 points less than what conventional home loan lenders require. If you have more money to put down (at least 10%), you can even get away with a credit score between 500 – 579.

FHA loans require just a 3.5% down payment and allow debt-to-income ratios between 43 – 50%. This means that your total debts (new mortgage included) don’t take up more than 43 – 50% of your income before taxes.

VA Loans

The VA home loan program is great for veterans or current military members with less than perfect credit.

If you served in the military for 90 days during wartime, 181 days during peacetime, or 6 years in the National Guard or Reserves, you’re likely eligible. 

Why consider VA loans over any other program? They have the most flexible underwriting guidelines and the lowest closing costs. You don’t even need a down payment. The VA mostly focuses on your monthly disposable income or money you have left after paying your bills. If you have enough disposable income and you’re a veteran, you have a good chance at securing the loan.

Other Loan Options for 'Bad Credit'

What if you don’t qualify for an FHA loan and aren’t a veteran?

Lenders have alternative financing options. These loans aren’t backed by the government, so each lender has its own guidelines. Some lenders cater to borrowers with bad credit, giving you a chance to become a homeowner.

Look around for lenders that offer ‘private mortgage loans’ as they are often more flexible with the guidelines, giving you more options.

Ways to Improve your Credit

If you can’t find an affordable loan given the state of your credit right now, try these tips to increase your credit score. In a matter of a few months, you can bring your credit score up and get the loan you need:

• Pay your bills on time, eliminating all late payments
• Pay your debts down to reduce your credit utilization rate (the comparison of your total debts to your total credit lines)
• Don’t apply for new credit (every inquiry brings your credit score down)
• Keep old credit lines open but don’t use them (the longer credit length helps your score)

Don’t think you can’t get a mortgage just because you have bad credit. There are options. If you take a loan now that’s more expensive than you’d like, work on improving your credit and refinance the loan in a year or two when things look better. This allows you to buy your home when you want, and not let bad credit hold you back.