How to Get a House Loan with Bad Credit
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It can be difficult to get a loan when you have bad credit, but there are a few options available. Here’s what you need to know about how to get a house loan with bad credit .
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Assess your credit score
Your credit score is one of the biggest factors in whether or not you’ll be approved for a loan, and your interest rate will be determined by your credit score. The better your credit score, the lower your interest rate will be. If you have a poor credit score, you might still be able to get a loan, but you’ll likely have to pay a higher interest rate.
A good credit score is anything above 700. A fair credit score is anything from 650-699. Anything below 650 is considered poor credit.
If you have poor credit, there are still some things you can do to improve your chances of getting a house loan. First, assess your credit score and work on improving it. You can get a free copy of your credit report from each of the three major credit bureaus—Experian, Equifax, and TransUnion—once per year at AnnualCreditReport.com. Review your report for any errors and dispute them if necessary. You can also try to improve your credit by paying down any outstanding debt and making all of your payments on time in the future.
Get a copy of your credit report and identify the negative items
The first step is to get a copy of your credit report and identify the negative items. If you have any late payments, collections, or charge-offs, these will need to be addressed. You will also need to have a plan for how you will improve your credit score going forward.
Once you have your plan in place, you can start to look for lenders who may be willing to give you a loan with bad credit. There are a few things to keep in mind when searching for a lender. First, you will likely need to provide some form of collateral, such as a down payment or equity in another property. Second, the interest rate on your loan is likely to be higher than average. Finally, you may need to agree to a shorter repayment term in order to secure financing.
If you are willing to put in the work, it is possible to get a house loan with bad credit. By following the steps outlined above and working with a reputable lender, you can increase your chances of securing the financing you need.
Work with a credit counseling or credit optimization company
There are a few different organizations that can help you get your credit in order so that you can qualify for a conventional mortgage. Credit counseling services work with you to create a budget and teach you money management skills. Credit optimization companies will work on your behalf to dispute inaccurate items on your credit report, help you establish new lines of credit, and can even give you advice on how to use your credit cards responsibly to improve your score.
Consider a government-backed loan
A government-backed loan could help you get a house loan with bad credit. These loans are backed by the federal government and typically have more lenient credit requirements than conventional loans. There are four main types of government-backed home loans:
-FHA loans: Insured by the Federal Housing Administration, these loans are available to first-time homebuyers with credit scores as low as 580. Borrowers with credit scores between 580 and 619 can qualify for a reduced down payment of 3.5%.
-VA loans: Available through the Department of Veterans Affairs, these loans are open to veterans, active duty service members, reservists and unmarried surviving spouses. There is no minimum credit score requirement, but borrowers may need to provide alternative credit documentation if they have a limited credit history.
-USDA loans: Offered by the U.S. Department of Agriculture, these mortgages are available to residents of rural and suburban areas with incomes below 115% of the median income in their area. There is no minimum credit score requirement, but borrowers may need to provide alternative credit documentation if they have a limited credit history.
-Fannie Mae HomeReady® mortgages: Insured by Freddie Mac, these loans are available to first-time homebuyers with low to moderate incomes as well as repeat buyers who may or may not be first-time purchasers. Borrowers must complete a homeownership education course and there is a minimum 3% down payment requirement (5% for repeat buyers). Borrowers must have a minimum 620 credit score to qualify.
Find a cosigner
One option for those with bad credit is to find a cosigner who can help you get approved for the loan. A cosigner is somebody with good credit who agrees to sign the loan with you and be equally responsible for making the payments. This can be a family member, friend, or anybody else who meets the lender’s criteria.
If you default on the loan, the cosigner will be held responsible, so it’s important to choose somebody you trust and who is comfortable taking on that responsibility. The cosigner also needs to have enough income to cover the loan payments if you can’t make them.
If you can find a cosigner, it may be easier to get approved for a loan and get better terms, such as a lower interest rate. Even with a cosigner, however, it may be difficult to get approved for a loan if your credit score is very low.
Get a collateral loan
If you have bad credit, one of the best ways to get a house loan is to find a lender that will give you a loan using your home equity as collateral. This type of loan is sometimes called a home equity loan or a second mortgage.
With a collateral loan, the lender will use your home equity — the difference between the value of your home and the amount you still owe on your mortgage — as security for the loan. If you default on the loan, the lender can foreclose on your home and sell it to recoup their losses.
Collateral loans are available from many financial institutions, including banks, credit unions, and online lenders. The interest rate you’ll pay on a collateral loan will depend on your credit score and the equity you have in your home, but it will usually be higher than the rate you’d pay on a personal loan or line of credit.
