You’ll find a lot of information on the internet about bad credit home loans. Lists of bad credit-friendly lenders abound, but what do you need to know about these home loans and their alternatives?
The first thing to remember is that bad credit is a potential barrier to new credit for a reason–your lender is required to justify the loan and make sure you are a good credit risk.
And if your credit scores and credit history show that you haven’t been as reliable about making on-time payments and meeting your credit obligations?
Your lender has two options. One is to deny you the loan. This is what usually happens in cases where the lender cannot justify approving your loan due to credit issues.
Each lender has their own standards for credit, credit history, etc. so you should know that you’ll need to shop around for a lender willing to work with your credit score range.
But what about the stories we hear where a borrower has less-than-ideal credit and gets the home loan anyway? In such cases this does not necessarily mean that the lender made a bad decision about the creditworthiness of the borrower.
Instead, what it might mean is that the borrower had compensating factors that offset the bad credit information. What kind of compensating factors?
The most popular and the one many borrowers resort to if they are in danger of having their loan denied? Making a bigger down payment on the mortgage.
If your credit score falls within a certain range, your lender won’t require you to have compensating factors. But if your credit is below that range, and within a specifically lender-defined range of lower credit scores, you may still be able to get loan approval (depending on circumstances) if you are willing to make a larger down payment.
FHA loan rules say the lowest possible downpayment is 3.5%. But under FHA guidelines, if your credit scores are between 500 and 579, you might still get loan approval if you make a 10% down payment instead.
Note that those are FHA minimums and not lender standards. Your participating lender is permitted to have more strict FICO score requirements for the loan–ask what your lender’s FICO score ranges are for the lowest possible down payment and what the ranges are for 10% down instead.
You could try applying for a bad credit home loan instead of an FHA mortgage, but you will be required to make that larger down payment and depending on the type of loan you seek (non-FHA, conventional loans) and other variables.
A better solution might be to work on fixing your own credit and trying for an FHA mortgage instead. Work on establishing a 12-month minimum baseline record of on-time payments on all financial obligations (not just housing).
This will, over time, do a great deal to help your cause with the lender. You should also work on reducing your credit card balances to well below the 50% line (as it relates to your credit limit) an you should avoid opening new lines of credit in the meantime.
Taking a year or more to work on your credit can potentially save you from that 10% down payment and get your FICO scores back on the rise once more.