If you are done renting houses and want to buy your own home but have poor credit don't give up hope just yet. Lenders know that not everyone has perfect finances. Life happens! Low credit scores shouldn’t prevent you from owning your dream home. Getting a mortgage with poor credit can be challenging, but it's not impossible. We have listed some steps you can take to increase your chances of securing a mortgage with less-than-perfect credit.
How Poor Credit Affects Your Mortgage
Check your offsetting your score, that means you’ll want to be able to pony up some extra cash for a hefty down payment. Think of it as a tangible way for a lender to trust you’ll make your payments on time.
You may also need to provide a rent history. This could be a good addition to your mortgage application if you don’t have a lot of credit history. Sometimes, low credit scores are just a reflection of credit that has yet to grow. Let’s face it, credit is something you build over time with good financial behavior. A low credit score might result from a short credit history, not necessarily from a series of terrible financial decisions.
Finally, you may need to find a cosigner. This is another way to let the lender know you’re serious, as the cosigner backs you up. However, they will be responsible for the payments if you can’t make them
Buy Now or Raise and Save?
Sometimes, waiting and increasing your score can increase your savings. But are you willing to put off accepting those house keys and calling a space your own? The ultimate answer to this question lies in what your long-term goals are.
Another consideration lies in applying for a mortgage as a couple. Couples might be better off using a higher credit score to apply for the mortgage to qualify for a lower interest rate.
FHA Loans
Typically recommended for those with scores between 500 and 620, there are two tiers regarding down payment requirements. Those applying with a credit score of 500-579 should budget for 10% down, while a score above 580 brings that figure down to 3.5%.
VA Loans
Only “eligible military service members, veterans, and surviving spouses” can qualify for a VA loan. However, they do boast the “most generous credit score requirements.” That’s because there’s no minimum credit score at all. However, Summit Mortgage reminds us that “there are fees associated with a VA Loan that you will not find with other loan programs, but ultimately a VA loan will be your most affordable option.” Check with your local VA office for more details.
USDA Loans
You don’t need to be a farmer or work in the agricultural industry to apply for a USDA loan. Rather, it applies to properties within a rural area. Or more specifically, “an area with a population of less than 35,000.” The lowest credit score you’ll need to qualify is 640, but you often won’t be required to make any down payment at all.
State and Local Programs
First-time homebuyers enjoy eligibility for down payment assistance in many cases. Grant programs exist as well.