However, it’s no secret that a less-than-perfect credit score will affect your ability to be approved for a home loan. You want to achieve your dream of becoming a homeowner, but sometimes, your credit score and current level of debt make it feel impossible.
It doesn’t have to be this way.
The truth is that there are bad credit home loans out there — and they’re easier to qualify for than you might think.
In this post, we’ll tell you how to get approved for home loans for people with bad credit. We’ll also let you know how you can compare offers from multiple lenders so that you can get the best possible offer.
Read on to learn how to make home ownership a reality.
1. Get to Know Your Finances
We know that thinking about the state of your credit makes you feel incredibly anxious.
But you need to understand the realities of your credit score — and what you can do to improve it — before you do anything else. Remember that lenders usually evaluate your credit score from three different credit bureaus, and then go with the median score.
This means that, even if you don’t get the exact credit score that lenders will, you’ll still be in a close enough range.
If you want to be approved by bad credit mortgage lenders, taking even a few small steps to show that you’re working on fixing things before you apply for a loan can help.
Aim to lower your credit card debt to as close to 30% of your credit limit as possible. Also, make it a point to pay bills on time. Work on securing proof of current income, like a letter of employment and bank statements from the past three months.
Remember that lenders look at more than just your credit score. They also want to see your debt-to-income ratio and how much is in your savings account.
Finally, get real about your current spending. You will need to cut back on your expenses where you can, and instead, prioritize paying down your debt. Also, start saving for a down payment.
Try using these budgeting apps to help you to get a better sense of what you’re spending, and look for areas you can trim down for the time being.
2. Consider FHA Loans
Especially if you’re looking for bad credit home loans that don’t require a large down payment, consider government-backed loans like those offered by the Federal Housing Administration (FHA.)
In most cases, your down payment with these loans will only need to be about 3.5%, and you can even get approved for an FHA loan with a credit score of 500.
Be aware, however, that those with a lower credit score will likely have a bit of a higher down payment.
This is also an excellent choice for people who have had to declare bankruptcy, resort to payday loans online, or whose home has been foreclosed on in the past.
You’ll need to show proof of employment, pay stubs, and agree that the home you’re getting the loan for will be your primary place of residence.
Still, this is one of the easiest loans to both apply and get approved for.
3. Take a Look at VA Loans
VA loans are another one of the most popular home loans for bad credit.
If you’re a member of the military service, a veteran, or if you’ve lost your spouse who was involved in the service, you may qualify for a VA loan.
Even though private lenders provide VA loans, they are backed by the Department of Veterans Affairs. VA loans offer rates that are similar to those of standard loans.
In some cases, you might not even need to make a down payment if you’re approved for a VA loan. However, if you can afford to do so, it’s always a good way to increase your chances of being approved for a bad credit military loan.
However, you should be aware that, with a VA loan, you may not be able to borrow a large amount of money.
Consider the cost of the home that you’re looking into, and go from there. You may want to wait to purchase a home until you’re able to get a higher amount from a lender.
Talk to your spouse, browse the housing market, and consider your best options.
4. Research USDA Loans
If VA loans or FHA loans still don’t work for you, you still have other options.
Maybe people work with bad credit mortgage lenders who offer USDA loans.
These are especially helpful for those who want to be homeowners but, in addition to having bad credit, don’t have a high level of current income. In some cases, they can finance slightly over 100% of the home buying costs.
If you live in a designated rural area, these loans can also help you to afford the cost of a new home. They’re backed by the United States Department of Agriculture, which takes lots of the pressure off of lenders who offer them.
Be aware that you’ll need to meet certain eligibility requirements in order to be considered for a USDA loan.
5. Consider a Co-Signer
Sometimes, no matter how hard you to try to improve your credit score, save for a down payment, or even get a high-paying job that lenders will look kindly on, you just can’t make it happen on your own.
We know this is incredibly frustrating. But it doesn’t need to mean the end of your home buying journey.
Instead, you should consider asking someone to act as a co-signer on your loan.
What exactly is a co-signer?
It’s not someone who needs to live in the home with you, and it doesn’t even need to be a member of your family. Instead, a co-signer is someone who acts as a “non-occupant co-borrower.”
This is a fancy way of saying that they will help to make any payments on the home that you’re not able to. They have a stronger credit history than you do, and often, they make much more money than you might at the time of the loan application.
This can greatly improve your chances of getting approved for a loan. It’s also a popular option among younger home buyers, as well as those who are buying a home for the first time.
6. Show You Can Make a Higher down Payment
Many home loans for people with bad credit require a larger down payment.
But even if they don’t, if you’re able to offer more of a down payment, it could improve your chances of getting approved for a better loan.
This is because you’re proving to lenders that you can take on a larger amount of risk in the home buying process. Lenders also see a higher down payment as a sign that you’re not likely to walk out on the mortgage process or default on the loan.
A higher down payment is a clear statement of your intention to pay back a loan and actually purchase the home.
Anything above 10% is a strong start when it comes to a down payment amount that lenders will pay attention to. One of your options for getting to this 10% is to take out a personal loan online, which can then be repaid over a longer timeframe like an installment loan. This will then improve your likelihood of getting approved for your mortgage.
7. Shop Around
It’s important that you take your time and shop around when you’re in the market for bad credit home loans.
Going with the first option you see doesn’t help you to get the best rate, and often means you’ll end up paying more than you should.
You need to compare interest rates, down payments, the terms of the loan, and understand how much you can borrow.
Remember that there’s no penalty on the FICO credit score model when you make more than one mortgage loan inquiry (as long as you make these inquiries within the same two-week time span.)
In some cases, you may even be able to get a 45-day free look period, which means you can make inquiries about loans for much longer than two weeks.
When you speak to lenders, you should try to use the rates you’ve been offered by other lenders as bargaining chips.
8. Study up on Programs That Assist with down Payments
Still having trouble coming up with the down payment you need to be able to get approved for a loan?
The good news is that there are lots of down payment assistance programs in place across the country. They’re an especially popular option for people who are interested in buying a home for the first time.
You often need to fall within a certain income threshold to qualify for these assistance programs, but there are lots of different options to choose from. It’s not hard to find a program that’s a good fit for you.
Check out this list of assistance programs in your state, created by the Department of Housing and Urban Development.
9. Know Your Limits
So, you’ve followed the advice in this post, and you now have several potential options when it comes to home loans for those with poor credit.
Before you make your final decision, there are a few more things you should consider.
First of all, never borrow more than you know you’ll be able to afford to pay off one day. Especially if you get approved for a loan that’s a bit higher than you initially expected, it’s easy to get carried away with ideas for renovations.
Remember that it’s just as easy to get trapped in a cycle of debt, and find yourself unable to pay back your loan. You don’t want to be in a future situation where you’re forced to default on your loan.
Additionally, don’t use the money from a home loan for anything other than the purchase of your house. If you have money afterward, use it to make payments on the loan itself.
The Benefits of Applying for Home Loans
Of course, the obvious reason to apply for a home loan is to help you finance the home of your dreams.
However, the truth is that home loans have much more to offer borrowers.
Especially if you currently don’t have much of a credit history, taking out a loan is an excellent way to be able to establish one.
Additionally, applying for a home loan ensures that you’re able to be financially responsible throughout the home buying process. It helps to keep you accountable when it comes to making on-time payments, balancing your budget, and learning how to negotiate with lenders.
Above all, getting approved for a home loan can take at least some of the stress out of the home buying process.
Ready to Apply for Bad Credit Home Loans?
We hope that this post has helped you to sort through your best options when it comes to bad credit home loans.
Remember that making as much of a down payment as you can, looking into government-backed loans, and taking the time to shop around for the right lender can make all the difference.
Don’t let your poor credit stand in the way of your dream home.
Looking for additional lending advice? Want to understand how the loan application works? Ready to request a loan?
We can help you with all of that.
Use our loan application tool to get quotes from top lenders, and keep checking back with our blog for more invaluable lending advice. Here are some other articles you might find helpful:
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