Bad Credit Home Loans of VA Homeloans USDA Homeloans FHA Homeloans

Bad Credit Home Loans –

The process of applying for a home loan is no easy task for the would-be homeowner with bad credit. Before the major housing crisis in 2008, there were plenty of options to apply for a sub-prime loan, but that finance option has now essentially disappeared. However, there are still ways to get approval for a home loan with bad credit.

One of the most attractive options is the FHA loans which may accept applicants with a credit score of at least 500. With a little time and effort, it is possible to find an acceptable home loan program for those that do not hold perfect credit.


Check your credit score

A basic step to take when applying for credit is to obtain a copy of your credit history. This can easily be requested from one of the many credit agencies (Equifax, Experian and TransUnion) which will supply this information free when requested once per year. After checking your credit score you will see the real position and the likelihood of being offered a line of credit.

If the credit score is very low, you may want to put off applying for credit now and instead take the necessary action to improve your credit standing. By taking the necessary action to improve your credit you will look more appealing to lenders who will be able to offer better terms, conditions, and interest rate.

What are the loan options?

There are several types of bad credit loans that can help many afford a home. Let’s take a look at a few of the most common options:

FHA loans

Many of the traditional home lenders ask that a borrower has a credit score in the region of 620-640. At this range, there will be many potential homeowners that aren’t able to qualify for a suitable mortgage.

However, the FHA home loans are a viable option for those with the less appealing credit score. The FHA loans are administrated by the Federal Housing Administration who offer to insure these mortgages, which gives lenders greater flexibility in the terms offered to borrowers.

Many would-be homeowners will find the qualifying criteria a lot easier with this government-backed loan compared to most other conventional loans in the general market. The FHA loans have some of the most lenient requirements with plenty of options, such as an adjustable rate loan or a fixed-rate loan over a period of 15 or 30 years. FHA loans are often associated with sub-prime loans or the term “bad credit home loans”.

FHA loan requirements

The FHA loan requirements are typically more relaxed because the lenders know the amount offered to a borrower is insured. For this reason, the lenders have the option to accept the applicants that are in a riskier category. Credit requirements for this type of loan are lower than most offer loan packages offered by the different lenders.

The qualifying criteria for the FHA loans can include a credit score of 500 which is typically deemed as low which is subject to a 10 percent down payment. However, a slightly improved credit score of 580 can attractive better terms with a 3.5 percent down payment.

Most other loans start with a minimum credit score of 620 before a loan offer is made.


Using compensating factors

When in the process of applying for a home loan with bad credit there is the option to rely on certain compensating factors to lower the risk to the lender and increase the likelihood of approval. It will help to clearly show the reasons for previous financial hardship and to state the steps taken to recover and improve the credit history. Often, the loan applications made by those with poor credit will go through a process of manual underwriting.

A few of the compensating factors include:

Putting down a higher down payment (this should be at 10 percent or more)
Having a decent income with relatively low outgoings
Personal savings at a large amount
No issues with outstanding debts
Long history of employment (preferably with the same employer)
Already paying a similar rental amount (avoids sudden payment shock)

What options for the first-time buyer?

As previously mentioned, the first choice is likely to be the FHA loans. They are appreciated for the low down payment and low credit requirements. The lower eligibility requirement means this type of loan is a lot easier to get accepted for compared to a conventional loan.

Additionally, the FHA loan program has the option to accept the down payment in the form of gift funds. This essentially means that the full down payment can be paid as a gift by a family member or friend.

Also, there are a variety of grants aimed at the time-time buyers, as well as assistance programs for the down payment. You may wish to look at the HUD website to get further information on this.

Down payment grants and assistance

In many situations a home-buyer will be eligible for down-payment Federal Grants or assistance. Many of the available programs can be found by completing a search on the HUD website.


VA loans

The VA home loans are a viable option for an active member of the military or a veteran. There are plenty of benefits to apply for this type of loan package, such as no need to organize mortgage insurance or put money down. Also, the Veterans Administration doesn’t stipulate a minimum credit score – although there are many lenders that want a FICO score of 620 or higher. In certain situations, a lender offering the VA loans will be able to accept a borrower with a credit score in the region of 580.


USDA loans

The USDA rural development loans were created by the US Department of Agriculture to entice a potential homeowner to invest in property that is located outside a major city and more in a rural district of the country. This type of loan package is aimed at families with a low to moderate income.

While the term “rural” can lead too many people thinking of open road and farms, the fact is up to 90% of the United States finds itself eligible for the USDA home loan program.

Plus, there are several perks of applying for this USDA loan, such as the ability to apply for a 100% loan with no down payment necessary. However, with the down payment waived, the USDA mortgages are subject to higher credit score requirements compared to the FHA loans.

A typical USDA lender will ask for a credit score at the 640 mark. The rural loans are seen as a slightly riskier option for the lenders because of the no down-payment requirement.

Apply for the dual home improvement loans

Beyond the standard mortgage options to apply for a loan to cover the cost of the property, there are also several specific types of loans that not only related to the cost of the property, but also an extra sum for repairs or renovations.


FHA 203K loans

For the home buyer that is looking at a property that needs more than a basic makeover, the FHA 203K loan is a practical option to cover the cost of certain repair work.

The 203K loans are split between two specific packages: standard and streamline. The Streamline 203K is a very popular option. It gives borrowers the option to apply for an extra $35,000 to complete a wide range of repairs and renovation work. Any property in need of the more extension repairs, such as issues with the foundation or plumbing, will be better off applying for the Standard 203K loan.

The eligibility requirements for the FHA loan and FHA 203K loan are quite similar – although a higher credit score rating is necessary for the 203K. A qualifying mark for this type of loan is in the region of 640 FICO score.

How to find a credit lender with a poor credit score?

Every mortgage lender has the option to apply their own rules and regulations, and state the preferred credit score. Locating a lender that works with the low credit score buyer (approx 580) isn’t always a simple and straightforward process.

If you complete a quick search online, there are plenty of lenders that give low credit score borrower’s the option to fill out an application. However, the borrower should still be cautious and not simply provide the person details on literally any site in the hope of getting an approval. Do you own due diligence to ensure a particular company is reputable.

Even with a history of bad credit, there are still plenty of options to obtain a home loan that can match the specific circumstances.

Is it worth applying for pre-approved status?

Typically, getting pre-approved is an important part of the home buying process. This letter is a must-have in order to make an official offer on a new home. Also, there are plenty of real estate agents that don’t even bother to show properties to potential buyers without a pre-approval letter.

In order to qualify for the pre-approval letter, a lender will conduct varies checks on your personal information, such as a bank statement, review tax returns, verify your income and check credit reports. If the information gathered by the lender is deemed to be acceptable, they can issue a letter to confirm that you comply with the criteria to make an application for a mortgage.

However, even with a pre-approval letter there is no guarantee of being approved, it simply implies there is a high change of being accepted.

What are the credit score ratings?

A check of your credit score is a good indication of whether or not you will keep up with the timely mortgage repayments. The majority of lenders make use of the FICO credit score, which will grade individuals with a score between 300 and 850.

  • Very good 720 or more
  • Good is between 680 and 719
  • Fair is between 640 and 679
  • Poor is between 580 and 639
  • Bad is 579 or below

What steps can help to increase your credit score

If the initial check of your credit score indicates a less than satisfactory rating, the best course of action is to take action to get the score as high as possible. A high credit score is very appealing to lenders and will take a huge step to increase the chance of getting approved. There are plenty of credit repair guides that can be used to help the negative accounts.

For those with a sizable amount of existing debt, there is the option to use a debt consolidation scheme. This type of program can be effective at lowering debt at a quick rate mostly due to the fact the repayments are subject to a lower rate of interest.

Let’s take a look at a few tips for increasing the credit score for a future home loan application:

  • Avoid missing payments on loan or card payments
  • Clear outstanding balances on your credit cards
  • Limit the number of new credit inquiries
  • Check the credit report for any false information
  • Use a secured credit card
  • Ask to become an authorized user of a family member’s credit card
  • Get in touch with creditors to remove cleared accounts if still showing

How long to wait to apply for a home loan?

While it may look appealing to wait for the high credit score, there are also a few things to look at before delaying the loan application. The market value of homes is only going to rise, so it will benefit to avoid waiting too long or the monthly repayments will only increase. Banks still have low interest rates, so if you can apply for a home loan now, you will likely benefit in the long run.

All in all, if your mortgage application is declined by one lender, there is no reason to lose hope. The eligibility and credit score requirements vary from one company to the next, so keep applying until you are able to find an acceptable offer.