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Want a home loan, but have a poor credit history? Do not worry. The good news is that today, it’s very much possible to get a home loan with bad credit score. Although the process will be trickier and more expensive with higher interest rates and fees than for someone with better a credit score.
Want to learn more about loans? Here are 5 things you should know before you get a loan.
Ideally, you should focus on improving your credit before applying for a loan. But if you HAVE to urgently apply for a loan, it’s best that you do your research and learn about the various loan programs to get, with low credit scores. This article will guide you through some of the easiest loans to get with bad credit.
But first, let’s understand as to what is considered a bad credit score.
What is a bad credit?
A bad credit score in relation to mortgage lending usually refers to a score that’s near the minimum score that’s allowed for approval. Generally, a bad credit score falls below 630.
When you apply for a home loan, lenders will always check your credit scores. They generally rely on the Fair Isaac Corporation scores or the FICO scores. These scores — typically ranging from 300 to 850 — actually affect the status of your loan application as well as its terms and rates. Once your scores drop below 670 in the FICO scale, getting a loan can become difficult. But not impossible, mind you!
FICO Score Chart
|300 to 579||Poor credit score|
|580 to 669||Fair credit score|
|670 to 739||Good credit score|
|740 to 799||Very good credit score|
|800 to 850||Exceptional credit score|
These scores depend on various factors for determining your worth. These factors include credit history, its length, mortgage payment history, level of indebtedness, types of credits used, and any new credit accounts.
Are there any guaranteed loans for bad credit?
Yes. There are different government or government-sponsored agencies such as the Federal Housing Administration (FHA), Veterans Administration (VA), Fannie Mae, and Freddie Mac, and the U.S. Department of Agriculture. Despite the fact that all of these have minimum credit score requirements, they do look at other factors beyond your score.
Types of home loan with bad credit score
So, even if your bank has refused to give you a home loan with bad credit scores, exploring these loan options will help you get financial assistance.
Federal Housing Administration or FHA loans
Minimum credit score requirement: 500
FHA loans have one of the most lenient and easy-to reach qualifying requirements. The agency accepts credit scores as low as 500 to qualify for a mortgage loan or a home loan. This score requires a minimum down payment of 10%. If you have a score of 580 score, you will need to make a minimum down payment of 3.5%.
Furthermore, FHA loans have a shorter waiting period than conventional loans. If you provide judgments or tax liens and can provide written proof of a payment plan, canceled checks, or a bank statement that shows that you’ve timely made the first three payments — you will qualify for the loan.
Veterans Administration or VA loans
Minimum credit score requirement: none (but it depends on individual lenders)
VA loans is the ideal loan plan for military personnel who are in active duty or are retired military veterans. The best part is, you don’t have to make a down payment or mortgage insurance premium. And, there’s no minimum credit score requirement! Some lenders however offer VA loans keeping 620 as a benchmark.
Under this loan program, eligible borrowers can apply for a new mortgage just two years after a bankruptcy discharge or foreclosure sale.
U.S. Department of Agriculture or USDA loans
Minimum credit score requirement: 581
USDA loans are ideal for low-income buyers who want money to purchase homes in rural areas. The official credit minimum requirement is 640. But, the agency offers exceptions for borrowers with scores as low as 581.
The waiting period after a bankruptcy is three years. These loans follow the same guidelines as FHA loans regarding the length of time to apply for a new loan after a major credit event.
Fannie Mae Home Ready program
Minimum credit score requirement: 620
This loan program offers options for down payment as low as 3%. And, a minimum credit score requirement of just 620.
However, there are some issues with Fannie Mae loans. For instance, if you have a low credit score and make a down payment of less than 20%, you will have to pay for a private mortgage insurance — a monthly insurance premium that protects your loan or mortgage lender from losses in case you default on your loan repayments.
The lower the credit score, the higher will be your PMI. Also, the waiting period after a foreclosure or bankruptcy is much longer.
Freddie Mac Home Possible program
Minimum credit score requirement: 660
This loan has a minimum credit score requirement of 660 for mortgages. Freddie Mac loans are very much similar to Fannie Mae when it comes to foreclosures and bankruptcies.
Depending upon your score, existing loans or credit, and repayment capacity, the lenders of these loans present their loan terms for you to decide. However, do not expect the same rate of interest or repayment terms as you would get from a bank. And, the tenure of payment will also be shorter.
If you do not have any established source of income or do not have a job at all, you need to assure the lender that you will soon find a job or have plans to earn money. Without a repayment assurance, no lending institution will be willing to give you a loan for buying a home.
Having said that, there are many lenders who offer loans for the unemployed since the house acts as a lucrative collateral in such cases. You can find a number of companies offering loans online, and do preliminary research to approach a company that has the most suitable offerings for your needs.
Looking for a home loan? Peruse through Kukun’s easy loan options.
How to increase my chances of getting a home loan with bad credit?
People with bad credit scores often think that there is nothing they can do to strengthen their loan application when approaching a bank or a private lender. Although a poor score presents a weak financial portfolio, you can contact a lender and convince them to give you a home loan. You do need a steady income and sufficient savings though.
There are ways to help you land an acceptable loan offer from a private lender. Some of these include:
Opt for a high down payment
Simply put, bring more cash into the discussion. If you are willing and able to make a large down payment, it means that you need to borrow less money from the lender. This makes you more attractive to the lending institution, and you get a better deal. According to loan experts, being able to pay 10% of the total amount (or more) makes you a better investment for the lenders.
Ensure you have no outstanding debt
Another thing that lenders are reluctant to entertain is the existing loan or debt of any type. If you can manage to pay off all the existing credit card bills and debts before you apply for a home loan, your application is more likely to be approved, and you may get better terms.
Keep large savings or cash reserves
If despite poor credit score and job uncertainty, you have been slowly saving up to invest in your home, you might just get a loan anyway. By showing a decent level of cash reserve or savings, you assure the lender that you can pay back in easy installments without any worries.
Look for a low debt-to-income ratio
If you receive a decent paycheck every month and are looking for a loan of an amount according to your income capacity, it is more likely to be approved. When issuing loans, banks and private lenders look for a low debt to income ratio to make sure that you can repay in time and as per the terms of the loan.
Look for a reliable and flexible loan company online and discuss your home loan requirements with them. Make sure to read all the terms of lending before you agree to the loan and do not make any decision in haste. Always consider your financial readiness to buy a home before committing to a conventional mortgage or loan. Keep your down payment and money to cover closing costs ready before signing on the dotted line.
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With a smart approach and the right application, you can easily get a loan to buy the home of your dreams.