Bad Credit Mortgages

Getting approved for a home loan with bad credit is no easy task. Especially since the 2008 housing market crash, sub-prime loans almost disappeared. There’s great news though! FHA loans allow borrowers to have just a 500 credit score or higher to qualify. In this article you will learn about bad credit home loan programs and how to get approved despite having imperfect credit.

FHA Home Loans Back in the day, in order to get a mortgage you needed great income and credit, at least a 640 or higher to get approved. This made it impossible for many buyers, especially first-time homebuyers with lower credit scores to qualify for a home loan. FHA loans were created by the Federal Housing Administration in 1934 to increase home ownership in America. By insuring mortgage loans the risks lenders face was greatly reduced. It is much easier to qualify for this Government home loan than a conventional mortgage because of the lenient loan requirements. The term “bad credit home loans” often refers to an FHA mortgage, or sub-prime loan.

2018 FHA Credit Requirements Because FHA home loans are insured they are much less risky for lenders. They are able to lower their minimum requirements for a loan. No longer do you need to have a 620 credit score, people with poor credit can get approved. These “bad credit home loans” are known as a sub-prime mortgage. FHA loans allow for poor credit scores as low as 500 with 10% down and 580 score with 3.5% down.

Compensating Factors for Bad Credit:

If you have a poor credit rating then you will need to show some compensating factors that help make up for it. You will also need to show a financial hardship was the reason you fell behind on your monthly bills and you have since recovered and have re-established credit. Usually if you have poor credit your loan will go through manual underwriting. These compensating factors reduce the risk to the lender and increase your odds of getting approved with a poor credit history.

Compensating Factors:

Large downpayment (10% down or more) Low debt-to-income ratio High income No outstanding debt Large amount of cash reserves Significant amount of time with current employer Paying comparable rent payments – No payment shock.

First-Time Homebuyers with Poor Credit:

FHA loans have become a very popular mortgage for first-time homebuyers because of their low credit and down payment requirements. This also makes them easier to qualify for than a conventional loan. FHA loans also allow gift funds for the down payment. 100% of the down payment can be a gift from a friend or family member. First-time buyers may be able to buy a home with no down payment if you qualify for any homebuyer programs. There are various first-time homebuyer grants and down payment assistance programs offered by various lenders.

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