Most people looking to buy a home are often surprised by the choice of low credit home loans that exist today.
A majority of lenders today offer a variety of government-backed VA and FHA loans to borrowers with bad credit scores. While most are willing to offer loans to people with a score of about 580, there are a few that offer loans to people with a rating that’s as low as 500. However, such lenders aren’t easy to come by.
While people with a credit score of above 600 have far more options than those with lower scores, you will need a 620 score to qualify for a low-rate conventional mortgage. However, if your score is above 680, you are free to apply for almost any type of home loan available today.
The Best Mortgage Loans for Borrowers with Bad Credit
1. FHA (Federal Housing Administration) Mortgage:
Minimum Score: 500
Federal Housing Administration loans have the laxest credit score requirements of all major home loan programs.
Most lenders offer these loans to borrowers with a credit score of 580 or above – if you qualify, all you are required to put down is 3.5 percent.
If your credit score is lower than 580 (500-579), you still could qualify for a Federal Housing Administration loan. But there is a catch! You have to put down at least 10 percent of the loan amount.
While a viable option, the problem is that finding lenders that offer loans to people with a credit score that’s under 580 is quite hard.
Another great thing about FHA loans is that they, unlike other normal loans, do not carry risk-based pricing, aka LLPAs or loan-level pricing adjustments.
LLPAs are fees assessed to loan applications with bad scores or other “negative” traits.
While lower-credit Federal Housing Administration borrowers might experience some interest rate hits, they are usually lower than the rate increases on most standard loans. For Federal Housing Administration loans, this means that poor credit scores do not necessarily necessitate higher interest rates.
2. VA (Veteran Affairs) Mortgage
Minimum Score: 580-620
Veteran Affairs loans are common mortgage loans offered to service members, veterans, and military-affiliated borrowers such as eligible spouses.
Backed by the Department of Veterans Affairs, VA loans don’t require any down payments or continuing mortgage insurance payments.
It’s also worth noting that these loans have/offer the lowest rates of all loan options.
While VA loans do not have any minimum credit score requirements, most lenders will only offer them to people with a minimum score of 580, with a majority starting at 620.
Just like FHA loans, these loans do not have any risk-based pricing adjustments.
With VA loans, a borrower with a low credit score can get rates comparable to those offer to high credit score borrowers.
3. USDA (United States Department of Agriculture) Home Loans
Minimum Score: 640
USDA loans are popular for their low rates and 0 down payment requirements.
To qualify for a USDA loan, you will need to have a 640 FICO score; however, it’s worth noting that minimum credit score requirements will vary depending on the lender.
These United States Department of Agriculture-backed home loans exist for one primary reason – to increase homeownership in America’s rural areas.
For you to qualify, you have to show that you intend to purchase a house in a qualified rural area. Nevertheless, they still do apply to some suburban areas.
USDA loans also will not work if you earn a lot of money. Your income as a household cannot be more than 15% higher than the median income for households in your area.
4. Conventional Loans
Minimum Score: 620
Conventional loans are often not government-backed and typically charge borrowers with low credit scores higher fees and interest rates.
Freddie Mac and Fannie Mae, the top two conventional loan lending agencies in America, charge LLPA or loan-level price adjustments.
Their fees are based on two fundamental factors:
- Credit score
- LTV (loan-to-value): The ratio between the home value and loan amount
As credit score falls and loan to value rises, the fees charged go up.
Let’s say you have a credit score of 700 and can put down 20 percent of the value. In such an instance, you will only pay 1.25 percent of the amount in loan-level price adjustments.
If you have a credit score of 640 and 10 percent down, you will be charged 2.75 percent in fees.
It is worth noting that these fees only translate to much higher rates for those borrowing. As such, borrowers with low credit scores will end up paying higher monthly payments while paying more interest throughout the loan’s lifespan.
Most lenders require borrowers to have a minimum score of 620 for them to qualify for the loan. And while these loans are available to individuals with low credit scores, the fees charged often act as a deterrent.
To avoid these fees, most people with bad credit scores turn to FHA loans as they are far cheaper.
5. Freddie Mac Home Possible
Minimum Score: 620
The Freddie Mac’s Home Possible, a first-time homebuyer program, was released in March 2015 and was designed to help individuals get into homes with moderate credit and affordable payments.
The program is available for moderate and low-income individuals and a minimum down payment of 3 percent.
For most lenders, you will need a credit score of 620 or higher for them to consider offering you a Home Possible Loan with low PMI (private mortgage insurance) rates.
6. Fannie Mae HomeReady
Minimum Score: 620
HomeReady is a Fannie Mae home loan program designed for moderate- and low-income individuals. The program, released in December 2015, also comes with extended eligibility for home financing in low-income areas.
Unlike Home Possible, borrowers do not have to be first-time homebuyers for them to qualify.
Apart from its enticing 3 percent minimum down payment, the loan also comes with another attractive and unique feature: You can underwrite the loan using income from others within your household irrespective of their credit history.
Instead of basing your debt to income ratio on your co-borrower’s income and your monthly income, the debt to income ratio can include the income of your adult children, parents, roommates, or anyone who lives with you
Most lending agencies that offer HomeReady require borrowers to have a minimum credit score of 620 for them to qualify.
7. Non-QM (Non-Qualified Mortgages)
Minimum Score: 500-580
The QM or Qualified Mortgage rule, was established in 2014 by the federal government and was intended to create safer loans by limiting or prohibiting some high-risk home loan products.
It’s because of this rule that most loans require borrowers to have a minimum score of not less than 600 as well as private mortgage insurance and (or) a down payment.
However, there are loans known as non-qualified mortgages whose rules are a bit more flexible.
When banks do not offer their mortgages to investors, they are free to establish their own standards, such as determining credit score requirements for borrowers.
As a result, borrowers can find or acquire non-qualified mortgages with a credit score of less than 500. However, just like with Federal Housing Administration loans, you are more likely to get approved for a loan when your FICO score is above 580.
If you are currently in the market searching for these types of loans, consider checking out the specialty mortgage programs that some banking institutions offer that are neither government-backed nor conventional loans.
Alternatively, consider working with a mortgage broker that can recommend moneylenders and mortgages that suit your needs.
Does your credit need a bit of help? Do you desperately want to get that dream home you so desperately want for your family? Let the credit repair experts at Credit Supreme guide you through the entire process, and get you set up to buy the home of your dreams. Call us today or click the “Get Started” button at the top of our website. This could possibly be the best decision you have ever made for yourself and your family!