You can get a mortgage even if you have bad credit. As you will see, that really isn’t a problem.
But before we even start down this path, I need to be blunt. If you have bad credit as a result of past mistakes which you have since cleaned up – great.
This post could help you tremendously if you are in the market for a mortgage.
But if you have bad credit because you are still unable to pay your bills, have a sky-high credit utilization or have other markers that indicate you are in financial trouble, re-think your situation.
My suggestion is to bookmark this post and come back to it once your credit problems are legacy in nature rather than problems you continue to manufacture.
If you take on a mortgage in such a situation you are just making a bad situation worse. OK? Good. Let’s get to work.
Your Bad Credit History Doesn’t Have to Stop You from Getting A Mortgage
Assuming you have already changed your evil credit ways, you can get a mortgage – make no mistake about it.
It will take work and you won’t get the rock-bottom lowest rate. But if you take the steps I outline below, the chances are much higher that you will get a loan and get one at a lower rate than you otherwise would without taking these actions.
Have I captured your attention yet? Good.
Credit Scores and Mortgage Loans
As a rule of thumb, you need a credit score above 620 in order to get a traditional mortgage. Anything less than that and you will be considered a subprime borrower and therefore be charged a higher rate.
That’s because subprime mortgages represent more risk to lenders and they therefore need to be compensated for this higher risk.
Obviously then, your first step is to try to increase your credit score. Fix errors and adjust your credit behavior by paying all bills on time and reducing your credit utilization among other steps.
You may not be able to increase your score from 600 (or lower) to 750 overnight, but depending on the situation and the steps you take, you could see a change over 90 days that is significant enough to move your credit score into the 620 range.
(I’ve written very detailed posts on how to increase your credit score. Rather than duplicate that information, please follow the link above for more information.)
FHA stands for Federal Housing Administration. They are a U.S. agency the provides insurance to lenders who are approved with them. This insurance protects those approved lenders in case you default.
As you can see, FHA loans present very little risk to approved lenders so if you get approved with them, you can potentially get an amazing loan.
You may be able to qualify for an FHA loan even if your credit score is as low as 500.
If you go that route you can take a 15 year or a 30 year fixed or adjustable rate mortgage.
You’ll put 10% down payment but that money doesn’t have to come out of your pocket – it can come from a gift.
The good news is, if your credit score is 580 or better, you can buy a home with as little as 3.5% down. Unbelievable.
Keep in mind that your credit score will influence your ultimate interest rate so an FHA borrower with a credit score of 500 will pay higher rates than an FHA borrower with a credit score of 580.
And both borrowers will have to pay for PMI. But at least both will still be able to get a mortgage.
How Do You Qualify For FHA?
In order to qualify for an FHA loan, here’s what you need:
- Steady employment. You must have worked for your current employer for at least the last two years.
- Lawful residency in the United States, have a valid Social Security number and have reached age of majority.
- The property has to be used as your primary residence and you must have it appraised by an FHA-approved appraiser. If the appraisal must be in line with minimum FHA standards or you must bring the house up to those standards.
- Your mortgage payment, HOA fees, property taxes, mortgage and homeowner’s insurance can’t exceed 31% of your gross income. You might be able to qualify with a higher percentage if the lender applies for an exception and has good reasons for doing so.
- All the above PLUS all other debt payments (car, student loans, credit cards) must be less than 43% of your gross income.
- If you had a bankruptcy, it must be at least two years ago and you must have re-established good credit. If there were special circumstances, you can apply for an exception as long as your bankruptcy was at least one year ago.
- If you had a foreclosure in the past, it must be at least 3 years ago and again, you must have established good credit since. Again, certain exception can be made for good reasons.
(As you can see, these requirements are not that strict. And I suggest you take a minute, re-read those 7 requirements and think about it.
If you don’t qualify, maybe you should rent awhile longer until you do. Maybe the universe is trying to tell you something. If so, my experience is, it pays to listen.)
Of course, you’d be better off with a higher credit score (above 620) without using FHA. But if your credit score is on the low side, you owe it to yourself to check FHA out.
And there are a variety of other programs that might be useful to you especially if you are a first-time home buyer and/or a veteran.
Visit the HUD and VA Home Loans sites for more information. Also, a good real estate agent should be useful and may be able to steer you the right way.
Any other ways to get a mortgage with bad credit?
The first two steps, fixing and improving your credit and checking out FHA are by far the best advice I can offer. But there are other options.
For example, if you have the right family and/or connections, you might get a personal mortgage from an individual. They buy the house for cash and you buy it from them over time by making payments.
If you go this route, make sure an attorney draws up the paperwork of course – and make sure you are indeed able to make those payments.
Other alternatives include buying the house with a partner. If you can’t qualify for a loan and they can, this might work as long as long as you do make the payments as promised.
This can be a complicated tactic when it comes to tax deductions, liability and ownership so you absolutely need to consult with an attorney and a tax advisor prior to going this route.
Also, if your name doesn’t show on the mortgage, this process won’t help you establish or improve your credit score – so keep that in mind as you proceed.
As you can see there are many ways to get a mortgage to buy a house even if you have a lousy credit score.
Your first step is to determine why you have flawed credit history and right that ship ASAP.
Then, consider getting an FHA loan.
If all else fails, consider asking a rich friend to buy the house for cash and you buy it from them. Either that, or think about buying the property with a partner.
If you are committed, you can get a mortgage. But you have to be willing to do the hard work, think outside the box and (most important) be realistic about what you can and can’t do.