In the past, financial institutions have put stringent restrictions on lenders with bad credit creating fears that those with bad credit cannot secure a mortgage loan. The fear of loan denial has influenced a number of consumers with bad or low credit to avoid and not bother applying for mortgage loans.
Fortunately, bad credit will not automatically deny you a home loan these days. According to a recent Forbes report and according to Ellie Mae, mortgage lenders have a high demand for lending people with low credit rating. Of the total home loans provided in 2014, 33% were given to borrowers with low credit rating below 700. This was 6% higher than the 2013 figures. In 2015, it’s amazing that more than 40% home loans were given to individual with poor credit rating, and these figures are likely to get higher.
Here are tips on buying a home with bad credit:
Do appropriate research on the Federal Housing Administration (FHA). The Veteran’s Administration (VA) and FHA provide loans that come with lenient standards for loan qualification. If you are eligible, then you want to work alongside a lender who specializes in VA and FHA loans. Local and state programs have also been put in place to help individuals with challenges having their mortgages approved. To get more help, check with your local housing authority.
Hunt for lenders that require low down payment for home loans. The FHA specifically provides loans with fairly low down payments to those buying their homes for the first time. A typical down payment for a loan may be about 20%, the FHA may give a 4.0% loan. The FHA may be a good alternative when you have a poor credit rating. The FHA will even give you a loan with a credit score of 590.
It is recommendable that you save a sizeable down payment. The average loans call for about a 15% to 20% down payment. If you have a low credit rating, chances are that you will be required to pay more down payments as compared to those with good credit rating. Save as much as possible, as the lenders are more attracted to savers. Plan to save at least 20% or more of the total value of the house you want to buy. Also, prepare to pay for loan closing costs like survey fees, attorney fees, and title service fees among others. You increase your chances of getting a home mortgage with a low credit score when you have higher down payment amount.
Be prepared to pay higher interest rates than the normal interests for a home mortgage. It is almost a guarantee that with a low credit rating you will have to pay higher interest rates. Low credit score attracts expensive loan rates. This is largely because the lender views you as a high risk. These high interest rates are charged because the lender wants to cover for the high risks they are taken against lending people with high chances of defaulting. They want to ensure that they recover as much as possible within short time periods to ensure they are on the safer side.
It’s possible to buy a home with bad credit! Just be sure to have a nice chunk of money to put down on a house, and be prepared for high interest rates.