• O'rise Finance

How do I get a home loan with bad credit?

Updated: Oct 22, 2020

Written by Ellis Riles. Edited by N Taylor

Covering topics:

  • How to get a home loan with bad credit.

  • Why Bad credit will cost you

  • How to fix your credit

  • FAQs on bad credit

Having a good credit score will really enhance your chances of succeeding in getting the home loan you’ve always wanted – however, if you have bad credit, there are a number of ways you can still gain approval.

First, it is important you check your credit score to know exactly where you are working from. This can be checked online.

When purchasing a home, a bad credit score would be regarded as anything below 580 or so. Scores around the 670 mark are still considered to be ‘fair’ but you will really have the best chance at home loan approval with a score above 700. Improving the strength of credit score will do the best to raise your chances of getting the home loan you require. Expert professional help with our team at O’rise Finance Credit Repair can start the success of this journey, they take a close look at your credit reports and dispute charges.

Credit bureaus compile information about the credit habits of millions of people, and sometimes inaccurate information can show up on your credit report. Take the initiative to request a copy of your credit report and look it over for errors. If you find any, O’rise Finance Credit Repair will submit a fast dispute and get the error removed from your report.

Nevertheless, this is not to say that if your credit would measure up as a ‘bad credit’ rating you should give up looking for a home loan altogether. As the tips below reveal, there are ways to aid in your success in getting a home loan.

What if I cannot improve my bad credit to get the home loan I need?

1. Increase the amount you give for your down payment

20% is usually the amount advised by experts to be used as a down payment. This is in order to lower monthly payments and mean mortgage insurance is not required. As a customer with poor credit, increasing the down payment you make means you are more likely to get the home loan you apply for.

Putting down anything in excess of 20%, if possible, could offset your history of bad credit, leading to a reduced loan time. It is still possible to make a smaller down payment on your home loan though, but you will pay more per month.

2. Request help with your down payment (DPA)

Not having a 20% down payment saved for your home loan is also not the end of your homeownership dreams. You may be eligible for down payment assistance (DPA). The four different types of assistance that can help home loan approvals are grants, loans, loans with deferred payments, and loans that are forgiven over a set period. You must satisfy a few requirements for DPA. If you do manage to qualify, access to DPA can prove extremely helpful when acquiring a home loan – even with bad credit.

Make sure you seriously consider the monthly costs and how making these payments will affect your finances before taking out an extra loan to finance the down payment and closing costs.

3. What is DTI?

Your debt-to-income ratio (DTI). Your DTI is calculated by dividing your total debt including your house payment, by your gross monthly income. Ideally, when you are looking to buy a home, you want to shoot for a ratio that is no greater than 43%.

If you do the calculations and find out that your debt-to-income ratio is higher than it needs to be, do not worry; there are steps you can take to improve it. One way is to work on paying down your debts. Another is to increase your income. Either method will improve your DTI.

4. Show any extra savings

Showing you have extra funds may reduce a home loan lender’s fear about missed loan payments in the future. A surplus of cash can demonstrate, that even if you do have bad credit, your payments will be made on time.

5. Other types of credit data

If you have a bad credit history, you may want to look for other ways to show you are a reliable and trustworthy borrowing candidate, for a home loan.

Evidence such as rent history, utility payments, and cell phone bills are not usually included in traditional credit score models. You can enroll in programs that will recalculate your credit score with these other financial histories factored in for your home loan application. Demonstrating between one- or two years’ worth of consistent payments could help raise your bad credit score instantly.

6. Make your case

If gaining a bad credit score was the result of extenuating circumstances, you may consider informing your lender of this. Things such as an extended period of unemployment, a health emergency, or another reason for earlier financial troubles that have been documented are all examples of such circumstances.

Proving how these challenges have been resolved may verify as a reason why a bad credit score could be overlooked. Making a case to a home loan lender could be through a written formal letter or explained in person. It may surprise you that a lender is more understanding than you previously considered.

6. Work together with someone as a co-signer

Finding an individual, who themselves has a good credit score and will be willing to vouch for you as a co-signer, can dramatically improve your application. Always remember your co-signer is legally and financially responsible for paying your debt if you default on your home loan. You must ensure your co-signer is reliable.

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7. Search the market

By searching the home loan market, you may be able to find a better deal if you have a bad credit score. Many people initially only think of banks as mortgage lenders however, there are several other types of lenders such as credit unions, mortgage brokers, and online financial institutions as well as many more. Find out more by searching ‘mortgage/home loan lenders’ online.

What will a bad credit score cost you?

Whilst you may secure a home loan with bad credit, it is likely that you will pay more in interest than individuals who apply for the same home loan with better credit. This will then lead to you paying an increased amount over the full life of the home loan than if you had good credit.

Here is a real-time example: It assumes that you have taken out a 30-year FHA loan of $225,000 with a 3.5% down payment.

  • 580: 4.75%

  • 600: 4.625%

  • 620: 4.25%

  • 660: 4%

At the interest rate of 4%, you would get with a 660-credit score, your monthly payment would be $1,508.53 when you include fees such as PMI, property taxes, and other charges. Compare that to a payment of $1,606.24 at the 4.75% rate. That is a difference of nearly $100 per month, $1,200 per year, or $36,000 over the life of the loan. Therefore, it is worth investing in improving your bad credit score with the expert help with O’rise Finance Credit Repair LLC. With our knowledge and expertise, we can assist in improving your bad credit score and in turn get you a better deal for your home loan.

Should you wait to raise your bad credit score?

By raising your credit score with expert help by just 20 points you can increase the amount you pay over the lifespan of a home loan by $20,000. This can stretch to $70,000 if the score is larger – translating into savings of tens of thousands.

It is a smart decision to invest time in improving your bad credit prior to applying for a home loan. In as little as six to 12 months, your score can be raised from anything from 50 to 100 points.

How can rapid rescoring help?

If you begin to improve your bad credit score, you can request a ‘rapid rescore’ from your home loan lender. This means the score you are given will be ‘refreshed’ to include this new positive financial behavior. It is not possible to perform a rapid rescore or even request one independently and not all lenders offer them. Make sure to inquire with your home loan lender to find out if this process is an option for your credit score.

A final resort – refinance early

If you cannot spend time improving your bad credit score, you will experience higher interest and higher monthly payments. Working on your credit right away, whether you plan on getting a home loan immediately or in the future means you will be able to get better terms for your home loan at any time. Once you move out of a bad credit score into a good credit score your offers will improve

· Again, like acquiring the home loan itself, you will want to browse the market for the best refinance offer possible. The faster you raise the score, the faster you can lower your interest rate, therefore the less you’ll actually pay for your home. A refinancing agreement will come with its own closing costs and fees, so calculate what savings this will lead to and ensure you are not adding too many extra charges.

· Regardless of which way you choose to get the home loan you need, it is always the right time to start improving your bad/fair credit score to a good one. Whether you are putting your home loan on hold to get the mortgage you want or even refinancing your high-interest loan early, remain fixed and focused on your budget goals. It is never too late or too early to begin paying close attention to your financial health, rid yourself of a bad credit score, and make the most of your new financial status.

home loans with bad credit FAQs

We have expanded your knowledge on how bad credit affects your ability to get a mortgage and what loan programs might be best for you, we know that you have some more specific questions.

Can I buy a home after declaring bankruptcy?

The bankruptcy law gives you a waiting period required to get a new mortgage after you have claimed bankruptcy. It is also important during the waiting period to manage all your other credit on time and avoid opening too much new credit.

Can I get a home loan after a foreclosure?

If you have had a foreclosure, you will have to wait longer than you would after any other credit issue. It’s important that you know the date of the trustee’s sale before you talk to a loan officer — credit reports often misreport that actual date a property was finally foreclosed, and instead list the date the foreclosure was started.

In some states, a foreclosure can take several months, and even years to be completed. If there were extenuating circumstances leading up to the foreclosure, such as illness or job loss affecting the household’s primary earner, there may be exceptions allowing you to get a loan sooner.

Can I refinance a bad credit home loan?

Yes, you can still refinance your loan if you have bad credit. The question is, does it make sense? Getting a lower interest rate is one of the primary reasons people refinance their mortgages, and bad credit can hinder your access to the lowest rates. Your best bet is to shop around to find the lowest rate offered to you and to work with O’rise Finance Credit Repair to improve your credit as much as possible before applying.

Lenders may be willing to approve you for a cash-out refinance even if you have bad credit if you are using the extra cash to pay off lots of revolving debt that is maxed out. Besides getting rid of your monthly payments, paying off the balances on credit cards could also significantly improve your score.

Can I have a cosigner on a home loan?

Yes, you can have a co-signer on a loan but, asking someone to be your co-signer is a decision not to be taken lightly. This person will be on the hook for your loan if you miss payments, which puts his or her credit score at risk. And think about it, how often will someone agree to co-sign a home loan? I say repairing your credit with O’rise Finance Credit repair is your best bet.

Can I have late mortgage payments and still get a loan?

Most loan programs allow you to have a late mortgage payment or two and still be approved for a new mortgage. working with a credit repair specialist to remove late payments will help. Keep in mind that mortgage lenders are mostly concerned with verifying you will be able to repay a new home loan, so your payment history on a current mortgage is taken very seriously.

Will credit collection judgments show up on my credit report?

Depending on the original creditor, there are times when a judgment for a collection will not show up on your credit report. Collections are one of the worse lines on your credit. However, there are judgments that can be attached to your home, and if they are, the lender will discover them when they review the title report.

You may have to pay them off before you can close your loan. Or if you have a written payment plan, FHA, VA, and USDA lenders may accept a copy of the payment plan and proof of three on-time payments to approve your loan.

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