Knowing your options as a future homeowner is important because of the long term implications of the commitment. Before you invest in what will likely be the largest monetary outlay in your life, you need to understand every aspect of the process, including how credit affects your loan options.
You actually have more options than you think if your credit is not perfect. Here are a few of the best ways to become a homeowner even if you have to loan shop with bad credit.
The VA Loan
The VA loan is a loan meant specifically for veterans of the armed forces and their spouses. VA loans come with certain advantages, some related to credit. Most notably, otherwise qualified applicants do not need to have nearly as high of a credit score to initiate a loan under the VA umbrella. Currently, lenders who honor VA loans do not require a credit score above 620. This is possible to achieve even with a bankruptcy or a foreclosure on your credit record.
Aside from this, VA loans can be 100% financed, requiring no cash down payment to initiate. There is also no PMI associated with a low down payment loan under the VA umbrella. As well as options for home loans there are also business funding program for veterans.
The types of loans that were once secured by the Federal Housing Administration are now backed by the Department of Housing and Urban Development (HUD). HUD is a government agency that specializes in lending to people with bad credit. In some cases, you can qualify for a home loan with a credit score of only 580 or above. A good credit score generally falls within the 700 to 749 range.
The bigger down payment you have, the more likely you are to be approved for a low credit loan under the auspices of the HUD. Government sites advise having at least 3.5% as a cash down payment.
New credit requirements for Fannie Mae loans are more advantageous towards would-be home buyers saddled with low credit. Recently, the program made the first substantial changes in 25 years, and borrowers without any credit score at all may now qualify for a home loan under certain conditions.
Private Home Loan Lenders
Private lenders may be the best option for people with low credit for one reason: They have the most discretion when deciding who to loan money to. Unlike a loan that is monitored under the auspices of a government program, a bank can ideally give a loan to whomever it pleases. Your credit score can be completely decimated, or you may have no credit score at all.
In the real world, no bank is going to take the risk of borrowing to a high risk, low credit score borrower without that borrower jumping through some major hoops. If your credit score is below the standard credit range for that price range, you will likely need the following documentation:
- Proof of income – Lenders will want to know that you have a consistent source of income if you have a low credit score. Be prepared to bring at least 6 months of check stubs or a tax return showing your annual salary.
- Existing personal loans and other loans – Lenders will look at all of your outstanding credit amounts including auto loans, personal installment loans, credit cards and any other loans open on your credit report.
- Landlord recommendations – Lenders like to know that you are responsible with properties that you rent; this is considered an indication of how you will behave with a property that you are paying to own. If you need help paying the rent, more than likely they will not give you a loan for a mortgage.
- A cosigner – You will drastically increase your chances of getting a great home loan if you have someone who is willing to take legal responsibility for the loan in the case of your default.
- Cash – Cash is king. A down payment over 20% is a minimum for a private home loan and will greatly increase your chances of obtaining the loan. You will also bypass the PMI requirement that most banks require for a borrower’s agreement with less than 20% starting equity in the property.
There are always options for you even if you have bad credit. Consider the tips above to begin the process.