Bad Credit Mortgage Rates? | Mortgage Options for Low FICO

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February 6, 2018
Bad Credit Mortgage Rates

Bad things can happen to the best of people. A lot of people ask if someone can still buy a home with bad credit? A lot of people are confused if they can get a loan with 500 credit score and what are options if they have a low FICO score. Should they improve their credit score or not? What are bad credit mortgage rates when purchasing a house with a 580 credit score? That phrase can be applied to consumer credit as well. Individuals and couples can build a solid credit history only to have a series of events happen and what was once a pristine credit profile is now, well, not so pristine. Having a good credit history is critical in today’s world and building and managing credit is an ongoing task. Yet something like an extended illness, a loss of a job or a messy divorce can turn a good credit history into a bad one. But having bad credit isn’t a permanent situation. There are ways to rebuild credit and even get a mortgage with bad credit, you just need to know where to look.

First however, it’s important to know exactly where you stand so you’ll see what your mortgage lender sees. You can get a free credit report once per year at www.annualcreditreport.com. This is a site sponsored by the three main credit repositories of Equifax, Experian and TransUnion. Once you download and review the results, look for any mistakes that may appear. In most cases it’s better to improve your cedit score before applying for a loan. Bad credit mortgage rates can be higher than normal. A lto of people buy a house and refinance it with better APR in 6months after improving their score. Mistakes on credit reports unfortunately aren’t all that uncommon. Carefully review each credit account line item by line item and see if you agree with what is listed. If you do see that your credit history is being reported correctly and your credit is damaged, there are some programs you can still qualify for while still getting some very competitive interest rates.

FHA Loans

FHA loans are a popular choice for home buyers for several reasons but the low down payment requirement of 3.5 percent of the sales price and relaxed credit guidelines are probably the two most important ones. It’s easier to save up 3.5 percent for a down payment instead of 20 percent for a conventional loan, for example. And as it relates to credit, FHA loans do provide lenders with more leeway when making a credit decision.
FHA loans were first introduced back in 1934 as a way to help stimulate a recovering economy and provide a path to home ownership for those having trouble saving up for a down payment which could be 20, 30 or even 40 percent or more. FHA credit requirements do require a minimum credit score but the requirement is much lower compared to a conventional mortgage.
The minimum score as required by the FHA is 580 with a 3.5 percent down payment but with a 10 percent down payment the minimum score can be as low as 500. Note here however, even though a credit score might be say 520 if there are other credit issues such as a recent bankruptcy that may require the borrowers to wait until more time has passed while repairing credit. Bad credit mortgage rates varies, they depend on many factors.

VA Loans

The VA loan is one of the three government-backed home loan programs in today’s mortgage marketplace. The other two such programs are the FHA and USDA loans. The term “government backed” means the VA loan carries a guarantee to the lender issuing loan. Should a VA loan ever go into default, which is rare as the VA loan is the highest performing loan of any conventional or government loan, the lender is compensated at 25 percent of the loss. This guarantee is financed by what is known as the VA Funding Fee and is a form of insurance that backs the lender guarantee.

  1. The VA home loan program is an important part of the original Servicemen’s Readjustment Act of 1944, commonly referred to back then as the G.I. Bill.
  2. The G.I. Bill contains several provisions to help soldiers returning from WWII more easily assimilate back into civilian life.
  3. A few of these original provisions include educational grants and loans, loans to start a business and a new mortgage program designed to help veterans buy and finance a home with as little cash to close as possible.
  4. The VA home loan program has evolved over the years and today is hands-down the best available mortgage program for eligible borrowers wanting a low-cost home loan program.
  5. The VA loan can be used for those with what some consider to be bad credit, average and excellent credit profiles.

The funding fee can vary based upon the type of loan being financed, any down payment in the transaction and how many times a borrowers have used all or part of their entitlement. For first time buyers using a VA loan even for someone with bad credit today is 2.15 percent of the sales price on a 30 year loan and no down payment. For example, if the sales price of a home is $250,000, the funding fee would be $5,375. This fee is rolled into the loan amount for a final loan amount of $255,375.

VA loans are one of the programs that do not require a minimum credit score. However, VA approved lenders do and most VA loans asks for a minimum 620 score while some will allow for a score as low as 580.
VA loans are available with no money down and no monthly mortgage insurance and offer both fixed and adjustable rate programs. Those eligible for this program include veterans, active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members with at least six years of service and surviving spouses of those who have died while in service or as a result of a service related injury.

What are Bad Credit Mortgage Rates For Va Loan?

When a VA home loan application is submitted the lender begins a process of evaluating the property and the borrower. The property is reviewed based upon the results of a property appraisal. The appraisal is ordered by the lender via an appraisal management company who then forwards the request to an approved appraiser. The appraisal will not only inspect the property but perform some basic research identifying similar properties near the subject property that have sold within the previous 12 months. Once the property research has been completed, the final value is listed in the appraisal, returned to the appraisal management company and ultimately to the lender placing the original order.

The borrower is reviewed based upon employment, income, assets and credit history. VA loans ask that there be at least two years of full time employment and will verify this tenure with copies of the last two years of W2 forms. To confirm current gross monthly income the lender will ask for the most recent copies of pay check stubs covering a 30 day period. And even though there is no down payment required there will be closing costs and to verify sufficient funds to close, copies of recent bank statements are needed.

Va Loans With Low FICO For Self-Employed People

The veteran is also restricted from paying certain types of closing costs, further helping the veteran limit the amount of funds needed at the settlement table. Veterans are only allowed to pay for an appraisal, credit report, title insurance and related title charges, origination fees, recording charges and a survey where needed. Of course low FICO will affect bad credit mortgage rates in a same way as affects an FHA loan. For someone that is self-employed or receives more than 25 percent of annual income from sources other than an employer lenders will ask for copies of the last two years of income tax returns, both personal and business. As it relates to credit, lenders will pull a credit report and request credit scores from each of the three main credit repositories of Equifax, Experian and TransUnion.

USDA Loans

USDA loans, like VA loans, do not require a down payment either but the property does have to be located in an area that has been designated as “rural.” If a property is located within an approved area the USDA loan can be used.
USDA loans also limit the amount of household income to 115 percent of the median income for the area. Most lenders require a minimum credit score of 640 for a USDA loan.

FHA 203(k) Loans

The FHA 203(k) program is designed for those who wish to buy and finance a property while also borrowing funds to repair, renovate or rehabilitate a home that needs a little TLC. Borrowers can finance such improvements as an upgraded bath, kitchen, new appliances, HVAC systems, flooring, roof and foundation and other items.
Minimum credit scores for 203(k) loans are typically 640.

How Low FICO Affects Your Mortgage Rate

Bad credit loans is somewhat of a relative term. What one borrower might think is bad credit might not be bad from the lender’s perspective. A credit report will list payment histories of all current and previous accounts, balances and monthly payment requirements. A Borrower doesn’t care about their FICO score. They care more about a bad credit mortgage rates and how much they will pay per month after buying tgheir home.  Credit scores are a numerical assignment of what is actually in the credit report. The scores range from as low as 300 to as high as 850. The score mortgage companies use today is the one developed by The FICO Company. Scores are calculated using five primary factors with each contributing its own weight toward the final score. They are:

  • payment history (35%)
  • account balances vs. available credit (30%)
  • how long someone has used credit (15%)
  • types of credit used (10%)
  • consumer requests for credit (10%).

So who do VA loans use credit scores? Different loan programs can require a different minimum credit score but today the minimum for a VA home loan is 620. FICO says however that a credit score of 620 falls into a range labeled “Fair” but does not have any category labeled “bad.” VA loans can also be approved with credit scores as low as 580 based upon other positive factors in the loan application.

One interesting point is consumer perspective. Lenders can evaluate a credit history by using the FICO system but doesn’t necessarily label a credit history as “Bad,” “Good,” “Fair,” Poor,” or “Excellent” but relies on the credit score. Someone might think they have a bad credit history because they were a few days late on paying a credit card bill multiple times over the past few months but it would surprise them to know that scores only fall if a payment is listed as more than 30, 60 or 90 days late and doesn’t push credit scores lower when a payment is made say five, 10 or 15 days past the due date. So how bad credit mortgage rates affect their monthly payments.

Case scenario

Suppose a borrower looking to buy a home worth $350,000 has a 20% down payment and applies for a 30-year, fixed-rate loan of $280,000. He has a 780 FICO credit score, which gets her a 3.92% rate. That’s around $1,324 a month, not including taxes, insurance or homeowners association fees.

If this borrower’s score dropped by about 100 points to between 620-660, her rate would increase to about 4.525%. At that interest rate, her monthly payment would increase to about $1,423, an extra $8.25 a month, or $99 per year.

Disclaimer: Above data and values are taken from bankrate.com Interest rates are varies on case by case scenarios. We don’t guarantee or quote any rates here. It’s just an example.

That means a couple who thinks they have bad credit and wants to finance their purchase with a VA loan might qualify for a mortgage after all. What’s important is to make sure a VA home loan application is submitted to a VA approved mortgage company that is also a direct lender. What is a direct lender?

A direct lender is a mortgage company that has the ability to make the final judgment on a loan application. Direct lenders have more flexibility as it relates to credit and FICO scores and if a loan has a qualifying credit score of say 605, the loan may still be approved if the lender identifies other positive aspects of the loan file such as low debt to income ratios, a lengthy employment history or a large down payment. We at USA are direct lenders and are VA approved and have the ability to make such judgements. Don’t prejudge your own credit, let us take a look at what you’ve got and provide a personalized path to home ownership.

Compensating Factors For a Mortgage

Finally, when lenders do approve mortgage loans for people with bad credit they do so by reviewing other positive aspects in the loan file. For example, consider an FHA loan with a qualifying score of 550. The lender may still decide to approve the loan based on the fact the borrower has been at the same job for 15 years and the credit score has been low due to a temporary reduction in income but has since recovered. Or, the debt-to-income ratios are much lower than required or there is a larger than required down payment.
However, and this is important, it’s the individual lender that makes this determination to approve a loan with bad credit but you have to know that  bad credit mortgage rates are a bit higher than rates for people with 750+ Fico score. A mortgage broker or other third party that refers a loan to still another lender doesn’t have the authority to make that decision, only a direct lender like USA Mortgage can.
If you or someone you know is having trouble qualifying for a mortgage due to credit, let’s talk more about your situation and see how we can get you into the home you want today instead of sometime in the future. With compensating factors and the right loan program, it’s probably easier to get that new mortgage than you might think.

If you have been denied a loan due to bad credit or have any questions regarding mortgages or real estate, please contact the author, Matt Herbolich, MBA, JD, LLM by phone or text at 786.390.9499, or by email at mherbolich@usa-mortgage.com. Mr. Herbolich works when you work, so contact him anytime.

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