Low Interest Home Loans for Bad Credit

What Credit Score Do You Need to Buy a House?
What Credit Score Do You Need to Buy a House?
October 16, 2018
Conventional Loan Credit Score Requirements
Conventional Loan Credit Score Requirements
October 29, 2018
Low Interest Home Loans for Bad Credit

So, you are planning to buy your own home. 

Buying a home is not an easy task. From deciding on what to buy, to saving money for it, it takes a lot of time and effort. One of the most important things when it comes to buying a house is getting mortgage loan. Since buying a house involves a lot of money, most of the people are unable to provide it in case at one time. Thus, their only resort is to take homeloans. However, there are certain conditions for getting a home loan as well and you need to meet them to be able to get the desired amount.  

One of the main things that the lending authorities take into consideration when lending money is the credit history of the applicant. In simple words, they consider a person with a good credit more eligible for the loan than a person with a bad credit.  

Getting approved for a home loan is not an easy task. And it becomes even more difficult if you have a bad credit. Sub-prime loans have almost disappeared since the housing market crash of 2008. This has made it even difficult for the people with bad credit to get loans.  

But, is there any way they can get a home loan and turn their dream of owning a home a reality? 

The good news is, yes, they can! 

There still are some mortgage options even if you have a bad credit. Federal Housing Authority, FHA, offers borrowers a loan if they have a credit score of just 500. Thus, if you have bad credit and want a home loan, then going to the FHA is the right thing to do. 

Here is all you need to know about low interest home loans for bad credit and how to get them. 

FHA Home Loans – What Are They? 

As mentioned before, buying your own house is not as simple as it sounds. Hardly anyone is able to pay so much money to buy a house. The only resort they have is to go for home loan, which is offered by a number of lending institutions. These loans help them make the payment for their house and is returned to the lender along with the interest after a decided period of time.  

The government of the U.S. created the Federal Housing Authority in 1934 to encourage the ownership of homes in the U.S. citizens. To get a mortgage loan, you need to be able to pay a huge down payment, have a good credit score and a good employment history. Not everyone who applies for home loan has all this. To help such people who don’t have a really good credit, the FHA decided to come up with low interest home loans for bad credit. Your loan application will now not be denied if you have a bad credit. 

FHA offers a great alternative to private lending institutions. The popularity of FHA loans among U.S. citizens is because of the flexibility it offers. While the FHA doesn’t lend money directly, it does so by insuring the loan given by a private lender. The mortgage is insured by the FHA which helps the lender gain confidence that the money will be paid even if the borrower defaults. Thus, an FHA approved loan is one of the most popular and convenient forms of mortgage loans to get in the U.S.  

Credit Score 

Credit score, in simple terms, is a numerical expression that represents the credit worthiness of an individual. It is based on a level analysis of a person’s credit files and the credit report information from credit bureaus. Lending institutions, such as banks, use credit score to determine the risk posed to them by lending money to their consumers and to reduce the risk of loss in terms of bad debt. Lenders also use credit score to determine who qualifies for a loan and who doesn’t. It also helps them in determining the credit limits and the interest rates to be given to the consumers.  

If you want to buy a house or are looking for your options to get loan for financing your existing mortgage, the first thing you should be doing is checking your credit score.  

For the people with a bad credit, they can opt for 15 years or 30 years fixed or adjustable rate mortgage. Bad credit home loans are also known as a sub-prime loan or simply FHA mortgage.  

FHA Credit Requirements 

Since the loans taken through FHA are much more secure than the ones taken otherwise, private lenders also lower their minimum requirements for these kinds of loans. There is no longer the need to have a credit score of at least 620 to be able to get a home loan. People with a poor credit are also approved. These sub-prime loans are ideal for the people who have a bad credit. 

Here are the FHA credit requirements to get a sub-prime home loan. 

  • 3.5% down payment with 580+ credit score 
  • 10% down payment with 500-579 credit score 

It is important to know your credit score before you go on and apply for a home loan. You can get your free credit score and credit report from one of the following reliable websites.  

Compensating Factors for Bad Credit 

There are some compensating factors that you will need to make up for if you have a bad credit and are applying for a home loan. You will also have to prove that it was the financial hardships that made you fall behind schedule on your monthly bills and you have re-established credit since you have recovered from them. Your loan will most probably go through manual underwriting if you are applying with a bad credit.  

Your odds of getting approved are increased with the compensating factors. Here is the list of the compensating factors to look for: 

  • Low debt to income ratio 
  • Large down payment  
  • No outstanding debt 
  • High income 
  • Large amount of cash reserves 
  • Extended time with current employer 
  • No payment shock  
  • Paying comparable rents already  

Are You A First-Time Home Buyer with A Poor Credit? 

FHA loans are the most popular loan options for the first-time home buyers because of their low down payment and credit requirements. They are also easier to apply for as compared to the option of conventional loans because of these minimum requirements.  

Another benefit of FHA loans is that it allows gift funds to be used for down payment. In fact, 100% down payment can be done using a gift from a family member or a friend. As a first-time home buyer, you may also be able to qualify for any home buyer programs and may have to pay no down payment for it as well.  

You may also be able to qualify for Federal Grants and down payment assistance. There are local state program listed on the HUD website that you can check to see the available programs.  

VA Home Loans 

Are you a veteran looking for mortgage to buy a home? 

If yes, then you may also be eligible for VA home loans. There are many benefits of opting for VA home loans. There is no need for mortgage insurance as well as no money down. There is also no minimum credit score requirement for VA loan. However, most of the lenders look for a credit score of 620 or higher for approving these loans. Some lenders are also able to work with a credit score of 580. 

Rural Development Loans  

The U.S. Department of Agriculture developed USDA home loan program to encourage the ownership of homes in the rural areas of the country. These loans are specially designed for the families with a low to moderate income level. Most of the people think about open roads and farms when they think of the word ‘rural’. However, you will be surprised to know that about 90% of the country falls under the USDA eligible location.  

USDA home loans are 100% financing home loans. However, since there is no down payment requirement, the credit score requirement for USDA loans is a little higher. To qualify for home loans, most lender require a credit score of at least 640

Getting Pre-Approved  

If you are planning to make an offer on a home, you will need a preapproved letter. Most of the realtors will not even show you any properties unless they are sure that you are preapproved. A preapproval letter is a statement that your credit report has been checked by a lender, in addition to verifying your bank statements, tax returns and your income. This is all done to ensure if you qualify for the mortgage you’ve applied for on the basis of the information you’ve provided.  

Mortgage Refinance Options 

Do you need help refinancing your existing mortgage? 

There are refinance programs created by the government to reduce the amount of foreclosures by allowing people to refinance their mortgage if they have a bad credit score. You can also refinance your home loan to a lower payment and rate, as it suits you and your financial conditions.  

Here are some loan refinancing options you can opt for: 

HARP: Home Affordable Refinance Program was developed by the Obama Administration in 2010. It was designed to help the Americans who were underwater on their mortgage. It allowed them to refinance into a lower payment and a lower rate.  

FHA Streamline Refinance: You can apply for this program if you already have an FHA loan. This FHA

Streamline Refinance doesn’t require an income verification or credit check. It is a great way to refinance into a lower rate for the people who have obtained money through a government loan. 

Home Equity Loan: A home equity loan is a type of loan where you can use the equity of your home as a collateral for the loan. Also, known as a second mortgage, the home equity loan can help you in bad times and works similarly to a credit card

Tips on Increasing Your Credit Score 

Before you apply for a home loan with a bad credit, you can try to improve your score as much as you can. Your chances of getting loan approval improve drastically if you have a better credit score. Have a lot of pending debt? A debt consolidation program can help you pay off your debt at a much lower interest rate and quicker than before. Here are some tips that can help you improve your credit score for mortgage loan: 

  • Pay down the balance on your credit cards as soon as possible 
  • Don’t miss any loan or credit card payments 
  • Don’t have a lot of credit inquiries 
  • Get a secured credit card 
  • Dispute negative information 
  • Contact creditors and ask them to delete collection accounts if you have paid them 

Are you not able to decide on whether you should apply for a mortgage or wait to improve your credit score? 

While there are a number of factors to consider before deciding on this, here are some important ones: 

  • Home prices are on the rise. The more you wait, the higher you will have to pay in terms of monthly payments. 
  • Interest rates are on the low side presently and getting a loan this time will help you get a lower interest rate. The rate you will get for a bad credit will still be higher, but still better than the interest rate you will get otherwise. 

Have you applied for low interest home loan but haven’t been successful? Don’t rely on just one lender for the home loan. If one lender denies your loan application, you can always find another one.  

If you have been denied a home loan or have any questions about real estate or mortgage 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 feel free to contact him any time.

Matthew Herbolich
Matthew Herbolich
Mr. Herbolich is a Senior Loan Officer at USA Mortgage, #NMLS 227262. He is an expert not only in lending but multiple facets of real estate, particularly the title industry. Matt trains his fellow loan officers on title industry topics, real estate investing, and countless mortgage guidelines. Have any questions? Call at 888-900-1020 or send email to: mherbolich@usa-mortgage.com

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