Applying For a Mortgage with a Bad Credit Score
Getting any type of loan can be difficult with bad credit. Whether it be a credit card or a student loan or a line of credit, it can be a nightmare trying to obtain various types of loans. Mortgages can be even harder if you’re credit is lacking. Creditors are looking for a good credit history, a low debt-to-income ratio and a stable income. Missing just one of these can get you denied. If it’s the credit that’s holding you back, there is help on obtaining a mortgage. Follow some of these steps and you will be able to get a mortgage for a new home that you have been dreaming of for so long.
First, make sure to review your credit to see if there may be an error. If there is, you can get it cleared up and have your credit score restored back to an acceptable level for creditors. If there is no error, don’t worry; there are still many other options to explore that will be helpful for you. Make sure you know exactly what your credit score should be and is when you apply for a mortgage. This is beneficial since the creditor will have to retrieve your credit which can adversely affect your score.
FHA Government Loans Source
To obtain a mortgage, the best option would be to explore an FHA Government Loan. FHA stands for the Federal Housing Administration and they are able to offer loans with low interest rates to those that have bad or less than perfect credit. Since this is a helpful program provided by the government, it doesn’t require a high down payment. With a low down payment and low interest rate, this could be the optimal choice for you and your family.
There are two large factors that play into qualifying for an FHA loan. First, you will need to prove to the FHA that your income will allow you to make payments for a mortgage. If you have a solid income with bad credit you should still be able to get a loan depending on the location of the property. That’s the other big factor. The dollar amount on the loans are limited by each county. Some of the higher priced housing locations (Southern California and Florida for example) are less likely to have a loan approved.
The down payment through this program is typically 3.5% which is considered to be very low compared to a standard mortgage. That will help to get you a long way in terms of options. If you are able to afford a down payment on a more expensive home that you wanted, it should be easily attainable thanks to that low down payment option.
Overcome The Low Score Limitation
There are limitations for the FHA loans however. You will still need to have a minimum credit score to obtain a loan. The minimum score depends on the amount of the loan and the ability to make the down payment but is usually set at 580 for FICO scores. (Buy THIS Credit Repair University guide to clean your credit within weeks). You will also be tied to the mortgage for the standard amount of time (usually 30 years) so if you are looking to possibly move in the near future again due to employment, you may want to pursue other options or just wait until you are settled.
You will be asked to show all of your documentation as well. Financial records, bank account statements, pay stubs and other documents may be necessary to obtain a loan through the FHA program. This is usually standard for any loan, so it’s no different for this program.
Now that you know the pros and cons of this type of loan, there are simple ways to apply. This website from the United States Department of Housing and Urban Development will tell you all you need to know about applying. You will be set up with a counselor who will help you explore all of the options and give you exact details on the FHA loan so you know if it’s the right fit. If you have bad credit, though, it is likely that this may be your best option if not your only option.
Angie Picardo is a writer at NerdWallet, a financial literacy website where you can find advice on your family’s financial needs from obtaining a mortgage to understanding finances in marriage.