The best home loan option with bad credit depends on how low your score is. If your score is below 600, you probably should look into an FHA loan or VA loan.
Of course, the best option is to work on repairing your credit score before you submit a mortgage application
. While this is not the answer borrowers want to read or hear, it’s the most practical and can save you thousands in interest payments. Not only will you have more mortgage options, but you might be able to get your loan with a lower income requirement and down payment.
Of course, as stated above, if you have a score of 500 or below, you probably won’t be able to do anything except wait until you increase it. Also, if you’re looking to buy a house with a bankruptcy
on your credit, you will need to wait at least 2 years before a lender will start considering you for a new mortgage with bad credit.
You can take the necessary steps to grow your score by understanding the following:
Payment history: Your payment history is responsible for 35% of your score. This is the main reason people are continually saying “pay your bills on time” regarding your credit score.
Credit utilization: The amount of credit you are currently using is also known as your credit utilization and is responsible for 30% of your score. The more credit you’re using, the higher your credit utilization, and the lower your score can become. It would help if you looked to keep your total credit usage under 30%.
Age of credit history: This is most often referred to as your “average age of accounts” and is one of the few factors you have almost no control over. Your credit history is basically the age of your oldest credit account, new credit accounts, and the average ages of all the accounts on your credit report. The length of your credit history makes up 15% of your score.
Credit mix/types of credit: When you look at your report, you’ll notice that there are a few different types of credit on your report. Those can be revolving credit (like credit cards) or installment loans (like car loans or personal loans). Having a mix of credit is a good thing for your score, and it is responsible for 10% of it.
Amount of new credit: Having an account less than 6 months old is usually considered having new credit. Your score will be impacted whenever you add a new account because it will give you a hard inquiry and decrease your average age of accounts. Be mindful when applying for new credit as it contributes to 10% of your overall score.
Increase Your Available Credit
Once you get a better handle on things and have started improving your score, increasing your available credit can help raise it a little faster. You can do this by either paying down balances or making a credit limit increase request. This effort helps increase your credit score because you will decrease your credit utilization, which is a huge factor in determining your score. Remember, it’s best to have a higher credit score to buy a house
and apply for mortgages.
And guess what: Most credit card companies allow you to request as many increases as you like without it causing a hard pull on your credit.
Add New Accounts (In Bulk)
Adding new accounts also means you’ll be increasing available credit and increasing your overall credit mix. Doing this in bulk is even better because it puts everything in the same time frame. Your inquiries will all fall off on the same day, any new accounts will age together, and you’ll add more available credit to your report.
This change also allows you to establish an even stronger payment history on your credit report. It usually takes less than 30 – 45 days to see the effects of adding bulk, new accounts to your report.
Pay For Deletions
One of the worst items you can have on your credit report is a collection. Collections show lenders that you owe money to someone and have not attempted to pay it back.
Even if you pay the collection off, it can remain on your report as “Paid,” which is better than having an outstanding collection. However, the best result which will help even more is to request the items be deleted from your credit report if you make a late payment.
Before making a payment for deletions, make sure you get the transaction in writing. It will be like you never received that collection, thus increasing your credit score and giving lenders one less reason to decline you.
Stay Away From Hard Credit Inquiries
While getting an insurance quote won’t affect your credit score, applying for any type of new credit will. Having too many hard inquiries on your credit is not a good thing.
When applying for any type of financial transaction that requires a credit pull, always check if it’s a hard or soft pull. Avoid doing anything requiring a hard pull close to when you apply for a mortgage.
Find A Co-signer
Depending on your mortgage, you may be able to qualify for a home loan with a co-signer. This addition can help bump you over the credit threshold as the co-signers income and assets will be considered along with yours. You may also qualify for a larger loan amount with a co-signer, even with bad credit, which can give you a bigger budget when shopping for a home.
In most cases, a co-signer will only help lower your debt-to-income ratio
, which by itself helps with qualification. Another person’s income and assets will make it easier for you to afford for a higher monthly mortgage payment. Most of the time, the lowest median credit score of all borrowers on the loan is the one that counts. However, if multiple borrowers are getting a loan backed by Fannie Mae, the guidelines allow for lenders to average the median scores of the borrowers. This can mean the difference between qualifying or not getting the loan.
For example, if you have a median credit score of 580 and your co-signer has a score of 720, you couldn’t qualify with both incomes until recently. Now Fannie Mae policy, in many instances, is to average the scores, coming out at 650. You can get a loan.
It’s important to note that for the purposes of determining your interest rate and mortgage insurance cost, the lowest median score is still used, so your rate may be slightly higher. Additionally, the averaging of credit scores doesn’t apply to every loan option. We encourage you to speak with your Home Loan Expert.
With a loan backed by the government like an FHA loan, you can qualify for a mortgage even with a 500 credit score. It might be tempting to buy a home as soon as possible, but it’s better to take the time to assess available options and interest rates while you start shopping for a loan
Equal Housing Opportunity. This is not a Good Faith Estimate and this is not a Guarantee to lend and should not be considered as such. Costs, rates, estimates and terms can only be determined after completion of a full application. Actual payments will vary based on your individual situation and current rates. APR for loans vary from 7.99 – 29.5% and is based on Credit Score, Down Payment, LTV, Income. Mortgage rates could change daily. To get more accurate and personalized results, please call 623 582 4444 to talk to one of our licensed mortgage experts. Terms and conditions of all loan programs are subject to change without notice. Level 4 Funding LLC, 22601 N 19th Ave Suite 112, Phoenix AZ 85027, 623-582-4444 NMLS 1018071 AZMB 0923961 This e-mail is for the exclusive use of the intended recipients, and may contain privileged and confidential information. If you are not an intended recipient, please notify the sender, delete the e-mail from your computer and do not copy or disclose it to anyone else. Your receipt of this message is not intended to waive any applicable privilege. Neither this e-mail nor any attachment’s establish a client relationship, constitute an electronic signature or provide consent to contract electronically, unless expressly so stated by Dennis Dahlberg RI/CEO, Level 4 Funding LLC, in the body of this e-mail or an attachment. To the extent this message includes any tax or legal advice this message is not intended or written by the sender to be used, and cannot be used, for legal or tax purposes or advice.
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.