Do you feel like your bad credit score will affect your chances of getting a mortgage?
Most likely that worry has kept you from pursuing the purchase of a new home.
We've all painted the image of our perfect home. We know where we want to live. We even have a Pinterest board detailing every aspect of the interior design.
It's so close, yet so far. Many Americans feel exactly the same way you do.
But how can I fix my credit score? Are there any options for me? Will you have to pay more than is fair because of bad terms?
Getting a mortgage with bad credit can be more work. But it doesn't have to be.
Let's discuss the ways to either improve your credit score or simply work around it. If you follow this advice, you'll not only get approved, you'll enjoy favorable terms.
Don't be defined by your past faults. Learning the way the system works is the first step. Then you'll know how to work with it.
Cheers to qualifying for your new home!
What is a Credit Score Actually?
The infamous Credit Score. It seems like we sometimes live and die by it. Getting a mortgage with bad credit standing can feel impossible.
The truth is our scores can be a great source of pride or a big source of shame.
We assume that our perceived poor credit affects our ability to get a mortgage. However, there are so many people who don't bother to even look at their score. Sometimes it's not as bad as you think.
If you've never looked, it's important to make that your first step.
There are several ways of going about this...
But first a brief explanation of the three main credit reporting agencies, or credit bureaus.
They collect consumer credit information and sell it back to other businesses in a document called a Credit Report. Your Credit Report details your history with credit. Ultimately determining your Credit Worthiness.
Keep in mind your scores might vary between bureaus. Sometimes lenders will use an average of the scores. Be sure to ask the lender their procedure for qualifying your credit.
What factors are included in a Credit Report?
1) Credit Score
This shows the lender whether or not you are creditworthy.
2) Personal Information
● Current and previous addresses
● Social Security Numbers
● Employment History
● Driver's license number
3) Account History
● When your first line of credit was established
● Number of accounts
● History of on-time payments
● High Balances
● Credit limits
4) Public Records
● Wage garnishments
● Soft Inquiries (an institution checking your credit report)
● Hard Inquiries (a new credit line with an institution)
Unfortunately, negative factors have staying power. These factors can make it difficult to get a mortgage with bad credit.
Did you know that late payments, delinquent accounts, and payments sent to collections stay on your Credit Report for 7 years?
If you end up declaring bankruptcy it will stay on the report for 10 years.
"But I've changed!" you say.
And we believe you, but that's the unfortunate influence of negative factors. It seems they are never forgotten.
That's why it's so important to stick with me and find out ways of getting a mortgage with bad credit.
Check Your Score
It used to be more difficult to gain access to your credit score. Simply inquiring could have had a negative effect on your score. Now there are several free ways of getting your score without impacting it in a negative way.
● Credit Karma is a great resource. It's free and offers advice on how to improve your score. Also, you gain access to your score from all 3 main credit bureaus. Check it every day if you like without negative effects.
● AnnualCreditReport.com offers a free annual credit report from each main bureau.
Looking for advice on how to optimize your credit? This will be important to do BEFORE applying. You can avoid the problems of getting a mortgage with bad credit.
Where Does Your Score Put You?
If you fear that applying for a mortgage with bad credit might affect your approval check out where you fall:
760 and above are low-risk borrowers
700 to 759 is a good score
650-699 is a fair score
650 and below reflects poorly.
Low-risk borrowers should readily find lenders at favorable rates. As your score decreases it becomes harder and harder for a lender to justify your reliability as a borrower.
IF your score is at 650 and below it will be important to try and raise it before applying for a mortgage.
Preparing your credit prior to applying for a new mortgage could make or break your chances.
One quick fix to improve your score is to pay down all credit cards to less than 50% of the total credit line.
Getting a Mortgage With Bad Credit
Sounds crazy but did you know there is a way to get a mortgage with a credit score starting at 580 and up?
Sounds too good to be sure right? It's not.
(FHA) Federal Housing Administration Loans
FHA loans are part of a federal lending institution that was created with the purpose of helping low to moderate-income earners to buy a house.
FHA provides mortgage insurance on loans made by FHA-approved institutions. This added insurance offers protection for the lenders in the case of default. It is a government-backed loan.
FHA was founded in 1934 to offer equal opportunities for all people entering the housing market regardless of income.
FHA makes it possible for so many people to qualify for a favorable mortgage with bad credit.
What are the terms?
As with all other loan types, there is a required minimum down payment.
For 2017, 3.5% is the required minimum for credit scores higher than 580.
And 10% for those with scores lower than 580.
That means on a $300,000 house you will owe a down payment of either 3.5% ($10,500) or 10% ($30,000).
Keep in mind it is always better to put more down payment if you can afford it. The more you put down the lower your monthly payment will be, and the more favorable your interest rate will be.
Note: If you can manage to put 20% or more down it might be possible to eliminate the required Mortgage Insurance Premium.
Another cost comes in the form of an Annual Mortgage Insurance Premium (MIP). This amount will be divided into 12 equal payments and added to your monthly mortgage payment.
The current rate is .85% and based on the Base Mortgage (Sales price - down payment).
For example, if you pay 10% down on a $300,000 house you will have a remaining amount of $270,000 (base mortgage) subject to a .85 % charge. That's $2,295 divided by 12 or $191.25 per month. This month will be added to your monthly mortgage.
Also, you will pay 1.75% of the full loan amount upfront. This is called an Upfront Mortgage Insurance Premium or UFMIP. If your remaining mortgage total is $270,000 (after 10% down) you will need to pay an additional $4,725.
This will be added to the base mortgage to determine the final mortgage amount ($270,000 + $4,725= $274,725).
Check how your FHA mortgage breaks down with this FHA Mortgage Calculator.
There are additional costs to getting an FHA loan. However for most that qualify the benefits outweigh the downsides. Rest easy, getting a mortgage with bad credit is within your reach.
Come and check out our FHA Loan programs and start to see yourself in your new home.
REFUND OF UFMIP
Did you know that you could get a refund of your UFMIP if you refinance your home within 3 years of the originating your FHA loan?
The refund will not be returned to you in cash but instead in the form of a reduced UFMIP on your next FHA loan.
As time passes after the closing date of the original FHA loan the % refund will reduce. In a sense its advantageous to refinance sooner than later.
16 months after closing escrow on your original FHA loan. You will be entitled to a 50% refund of UFMIP. If the original UFMIP was $4,725, you will be able to apply a reduction of $2,362.50 to your next FHA loan's UFMIP.
This refund will help you to reduce your second FHA loan's costs. This is just another perk to FHA loans and a silver lining to applying for a mortgage with bad credit.
First-Time Buyer Assistance
Gathering funds for a down payment can be a major barrier to entry for first-time home buyers. Even with reduced down payments through the FHA it can feel impossible to save what you need.
Family First FCU believes in boosting home ownership within their community. We pride ourselves on our personalized mortgage counseling.
We participate in the Federal Home Loan Bank of New York's First Home Club program. The program matches funds deposited in a savings account opened by the homebuyer.
If you deposit $1, we deposit $4. Matching your funds with a max contribution of $7,500. Sounds too good to be true, but it’s not.
These funds can be used towards the down payment on your first home.
To see if your family is eligible for this assistance program read through the qualifying criteria.
Veteran Affairs Loans (VA Loans)
The United States Department of Veteran Affairs aids those that have performed military service. Active and retired military members qualify for these loans.
VA loans qualify borrowers with a minimum credit score of 620. Some lenders are more strict and require a minimum score of 640. It varies within that range with lenders.
Your entitlement to a VA loan can be reused repeatedly as long as you pay off previous loans. That means a lifetime of him buying benefits.
Nationwide there are over 2,220 programs that offer VA loans.
Our VA loan programs have helped numerous families get a mortgage with bad credit.
Easy On Foreclosure and Bankruptcy
Unlike with other lenders, foreclosure and bankruptcy history can be excused if you qualify for a VA loan.
As we discussed before, foreclosure can stay on a credit report for 7 years or more. If you are a veteran you may qualify for a VA loan if it has been a minimum of two years since the foreclosure date.
This greatly helps those applying for a mortgage with bad credit.
If you are looking to buy a commercial property, or even a piece of farmland you may not qualify for a VA loan. These loans are reserved for properties that are classified as move-in ready.
Also, VA loans pertain only to primary residences. That means you cannot use your VA entitlement to purchase an income property. Sorry to say you also won't qualify to buy your dream house in Hawaii.
No Mortgage Insurance Premium
Unlike the FHA loans we discussed, VA loans require ZERO down payment, and ZERO Mortgage Insurance Premium (MIP).
The Veteran Affairs Department guarantees these loans thus Mortgage Insurance is not required.
This added savings can be a major factor for first-time buyers. Veterans have had great success getting a mortgage with bad credit using their VA entitlement.
VA Funding Fee
As we discussed there are no down payments or MIPs but there is a fee called a VA Funding Fee.
This fee is typically around 2% of the loan amount.
It can be rolled into the final loan amount. And even in some cases, it can be totally removed for veterans with service-related disabilities.
It's paid at the time of purchase and at the time of refinancing.
Be The Solution
Hopefully everyone is feeling better now. There are more options than you probably thought possible. There's hope for you yet.
Having a low credit score can be an embarrassing thing that makes you feel trapped. It keeps us from asking for more and from getting what we deserve.
There's no doubt that getting a mortgage with bad credit can be daunting. However, it's also a challenge to turn your situation around.
Check out the free sites to review your current credit score. Make changes when possible to improve it. Consider loan programs that are designed to help. Take pride in your veteran status and enjoy the benefits.
Feeling confident? Great!
Give us a call, come in and see us, or even live-chat when you and your family are ready to make the move.
The home of your dreams is just around the bend.