A credit report showing a poor credit score

How to Pay for a House with Bad Credit

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December 18, 2020

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Buying a house is an exciting yet nerve-wracking process for many. Homeownership is a significant investment that often requires a substantial mortgage loan. In order to get a mortgage, a bank or other financial institution will appraise different aspects of your finances—including your credit score.

But what if your credit score isn’t very high and the bank turns you down? You may think homeownership is out of reach, but it’s still possible through bad credit home loans.

What Exactly Is Bad Credit?

Bad credit is the term given to a score that falls beneath a specific threshold. This threshold varies between financial institutions, so what may be a compromising score for some organizations won’t mean the same thing to another. 

A FICO score, which is the type of credit score used by most financial institutions, is on a scale between 300 and 850. A bad score is most often any number that falls beneath 580, but different lending institutions may have slightly different definitions of a bad FICO score.

Lenders consider your credit score to be your financial track record. A low credit score—whether it’s from missed payments, a high debt-to-income ratio, or other factors—signals that you may be a risky borrower and decrease your chances of getting a traditional mortgage.

How Is Your Credit Score Determined?

There are five different factors that contribute to your overall score with each item having a different weight. Knowing these categories can help boost your score by helping you understand what areas to focus on and improve. Even if you qualify for a bad credit home loan, you should still be working toward the goal of a good credit score.

If you’re unsure about how to improve your credit score or don’t understand why it’s so low, consider talking to a licensed financial advisor. They can help you better understand the factors affecting your score and dive deep into why yours may be so low.

Payment History – 35%

Your payment history makes up over a third of your credit score, so it’s the most critical element. It includes:

  • Paid and unpaid bills
  • Delayed bills
  • Credit cards
  • Outstanding debts

Missing minimum monthly payments is one of the quickest ways to devalue your score. If you struggle with making payments on time, consider consolidating your debt or talking to the companies you owe money to and ask about your options.

Amounts Owed – 30%

The total outstanding debt you owe is the second major component of your credit score. Rather than how on top of making payments you are, this factor relates to the sheer amount of debt you currently possess. 

The higher that figure, the more compromised your score will be. If you have a lot of student loans or credit card debt, your FICO score could be affected even if you’re making payments on time. 

Credit History Length – 15%

Often overlooked, the length of your credit history can play an essential role in your score. 

A common misconception is that the longer you’ve been using credit cards to pay for things, the worse your score will be. Some believe it demonstrates over-reliance on funds you don’t have.

In reality, having a lengthy credit history puts you in a positive light—provided that you have made your payments on time consistently, of course. It shows financial institutions that you are capable of sticking to your financial obligations.

Credit Mix – 10%

This combination refers to the types of credit or debt you hold. It could include your rental history, credit card, or car loan. 

If you have multiple loans across different areas of your life, your score will increase. With just one type, your score will decrease. Because this element only makes up about 10% of your FICO score, it may not be necessary to worry about it too much. Instead, it may be better to focus on making payments regularly and reducing your overall debt load.

New Credit – 10%

Opening multiple new loans and credit cards in a short space of time is a red flag to lenders. Space out your credit applications to avoid appearing financially risky. If you recently applied for a credit card, don’t try to jump into your mortgage application the next day.

This factor can also be affected by “hard pulls” on your credit history, which are typically done during the application for a new loan. If you’ve been searching around for a new loan recently and had a lot of hard pulls on your history, it can negatively impact your score even if you don’t get a loan in the end.

“Soft pulls,” such as when you or an employer requests your credit history, don’t impact your score.

Types of Available Mortgages

Homeowners can apply for different types of home loans from different types of lenders. Lenders have different requirements for what kind of credit score they’ll accept, so some may offer bad credit home loans for a specific mortgage product while other lenders won’t.

We’ve listed just some of them below:

Conventional Mortgages

Convention mortgages are the largest categories of home loans. They are NOT insured by the federal government. They fall into a further two categories: conforming and non-conforming. 

A conforming loan falls within the maximum amount limit set by Fannie Mae or Freddie Mac. Non-conforming exceeds this amount limit and also referred to as “jumbo loans.”

To be eligible for a conventional loan, you will usually need a score of 620-670 or higher. Conventional mortgages aren’t ordinarily appropriate for those with bad credit. They are ideal for buyers who have strong credit and a stable income.

Government Insured Mortgages

These lending options tend to be a little more accessible for those with lower credit, making them a suitable choice for bad credit home loans.

These mortgages have the backing of the US government through three separate branches. They are the Federal Housing Administration, the US Department of Agriculture, and the US Department of Veterans Affairs. 

  • FHA Loans. These are perhaps most appropriate for bad credit home loans. You can apply for them with a score of 580, which can even go down to 500, providing you have a 10% deposit available. You can apply for these types of loans through a certified FHA lender, like Associates Home Loan.
  • USDA Loans. These are only available in USDA-eligible areas. They mainly apply to rural homes. Because they do not require a down payment, they are ideal for low-income borrowers.
  • VA Loans. Available exclusively for US military members, both active and veteran, and their families. These loans do not require a down payment, and the seller usually caps or pays the closing costs. The flexibility of VA loans is what makes them so accessible, provided you are eligible as active-duty or retired military personnel.

Bad Credit Home Loans (Subprime Loans)

Many lenders recognize that people with poor credit scores still want to be homeowners. That’s why some lenders will offer bad credit home loans, also called subprime loans. These special loan products are designed for aspiring homeowners with ‘subprime’ FICO scores, which are typically below about 550.

Bad credit home loans are ideal for people who have a poor credit history, a recent bankruptcy on their record, a high debt-to-income ratio, or any other factor that would bring their score down.

These types of loans may be associated with elevated interest rates and high down payments, so be sure to look at your options before making a decision. It’s possible to find a bad credit home loan for reasonable rates through a trusted lender like Associates Home Loan.

Need a bad credit home loan? Let us help

Associates Home Loan is the trusted partner of homeowners across Florida. We’re proud to offer reasonable rates and flexible options for those with low credit scores—even if other lenders have turned you away.

If you’re looking to buy your first home but are worried about your score, contact us today. Let our team help you afford the home of your dreams.

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