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Although it it is best to buy a home with good or excellent credit, it is still possible to get a mortgage with a lower credit score and some negative marks on a credit report. These are a few ways to get a home loan with a bad credit score.
Find A Federal Loan
Loans from the Federal Housing Administration or the Veterans Administration are good options for qualifying borrowers with poorer credit scores to get approved and still enjoy a good interest rate. FHA approves first-time buyers with scores as low as 550, and the VA offers loans to active and retired military personnel with poor to excellent credit. With FHA or VA loans, the down payment may be as low as 3.5 percent.
Use State And Local Programs
Contact the local housing authority. There are often state and local programs for mortgages or mortgage assistance for borrowers with lower credit scores. This is also a good way to find grants. Some communities that are focused on regrowth offer thousands of dollars in incentives or down payment assistance to borrowers who plan to buy a home and stay in it for a specific length of time. Many states have programs for first-time borrowers, which allow them to buy a home with a lower credit score and still enjoy a fair interest rate.
Use Private Lenders
Although many banks do not typically work with people who have low credit scores, there are private lenders available. The local housing authority may be able to offer some nearby suggestions. It is best to work with lenders using manual underwriting instead of automated underwriting. Manual underwriting means that the lender makes the judgment call based on all criteria and an assessment of the applicant's credit history. Automated underwriting means that a software program approves or denies an applicant based on the information entered. Not all stories are the same. Many borrowers today want to work with responsible applicants who may have made a few mistakes in the past, and they know how to sort them out from chronically irresponsible people regardless of a credit score number.
Look For Seller Financing Options
If the seller owns the home and is willing to accept payments, this is a good option for someone with bad credit. While interest rates are typically higher than prime rates for this type of agreement, the down payment is usually very low. With seller financing, the borrower makes payments to the seller, and the house is the collateral in the loan.
Offset A Bad Score
When working with a lender using manual approval methods, this is a good way to get approved. Lenders may look at a bad credit score unfavorably but still approve a loan if other criteria are met. For example, someone who makes a down payment of 40 percent may be approved regardless of having a poor score. Another applicant may be approved if she has paid all of her bills on time for a year and has cash reserves set aside to make a full year of mortgage payments. Be prepared to set up a plan like this with a lender.
One of the biggest issues to lenders regarding borrowers with good or bad credit is their debt-to-income ratio. A lender's main concern is that the loan will be repaid. If a borrower has a large amount of debt that consumes a considerable portion of monthly income in terms of repayment, the borrower is not likely to be approved. Anyone interested in purchasing a home should focus on lowering overall debt for a better chance of mortgage approval. Cut unnecessary monthly expenses, sell unused items to pay down debts or consider getting a debt consolidation loan to decrease liabilities. Although it may take some time to reach financial goals, it is possible to buy a home with a low credit score.