What You Need to Know About Buying a Home With Bad Credit

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If you’re buying a home, you’ve probably already heard how important your credit is.

Whether you’re a first-time homebuyer or not, it’s true that having good credit makes the process easier — and saves you money.

However, that doesn’t mean that it’s impossible to buy a house with bad credit. Even if your credit is less than perfect, you can still get a mortgage. You just have to change your expectations when looking into home loans for bad credit.

What is a ‘good’ credit score when you buy a home?

First, it helps to know what is considered “good” credit when you buy a home.

According to an article from the National Association of Realtors (NAR), an “excellent” score is one of at least 760. Bankrate points out that the lowest rates and fees require a borrower have a credit score of at least 740.

Whether or not you actually end up with the best mortgage rate depends on your lender, and, to some degree, your personal credit history. But, according to these experts, once you start getting below 740, you run the risk of paying a higher interest rate.

The NAR article says that a “good” score is anything between 700 and 759. If you have a score of at least 700, there is a good chance you can get a decent rate on your home loan. Things get a little more difficult when you slip into what the NAR article deems “fair” — 650 to 699.

Once you get below 650 you’ve moved solidly into the “poor” category, according to the NAR. This is where it starts to get even more difficult to find a lender willing to take a chance.

Types of home loans for bad credit

Conventional home loans

It might be harder to find someone willing give you a loan when you buy a house with bad credit, but it’s not impossible. Loan servicer Fannie Mae has a minimum credit score requirement of 620 for fixed rate loans and 640 for ARMs.

Some lenders end up selling mortgages to Fannie Mae. As a result, they won’t issue mortgages to borrowers who don’t meet the minimum requirements.

Lenders who don’t care if they sell mortgages to Fannie Mae (or Freddie Mac), might be willing to provide you with a home loan if your score is below 620. However, they will be taking on the risk, and might charge you a much higher interest rate to make up for it.

FHA and VA home loans

Using government programs can help you find home loans for bad credit, too. While the government doesn’t offer home loans, it does offer programs designed to encourage lenders to offer mortgages.

Two of the programs offered are by the Federal Housing Administration (FHA) and the Veterans Administration (VA). Both of these programs can potentially allow you to buy a house with bad credit.

A VA loan doesn’t have a minimum credit score requirement. However, the lender is still supposed to use a vetting process and decide whether you are a good risk. Additionally, there are eligibility requirements related to military service, so not everyone can apply for a VA loan.

The FHA does have a minimum score requirement, but it’s fairly low. According to the Department of Housing and Urban Development, it’s possible to get a loan with a score of between 500 and 579, as long as you put 10 percent down.

If you want maximum financing through the FHA loan program (3.5 percent down), you need a score of at least 580. That’s still a pretty low credit score. Most lenders won’t approve a loan for someone with a score that low.

No credit loans

You might be one of the millions of Americans who can’t even get a credit score. In that case, getting a mortgage might be practically impossible — unless you turn to alternative credit scoring.

Alternative credit scoring uses measurements other than loans to determine your payment behaviors. Companies like eCredable have arrangements with lenders to accept your non-traditional credit report when making decisions. So, this is also a possibility if you don’t have any credit history.

Home loans for bad credit can be expensive

Although it’s possible to buy a home with bad credit, it’s not always the option that’s best for your wallet. When you have bad credit, you can expect to pay a much higher interest rate.

Let’s say you want to buy a home and borrow $200,000 for 30 years. With good credit, you can get a mortgage rate of about 4.15 percent. This means you will pay a total of $349,994 and have a monthly payment of $972.  But if you have poor credit and are charged a higher rate of 7.5 percent, there’s a significant difference: a total of $503,434 and a monthly payment of $1,398.

That’s a big deal. You end up paying more than $400 extra each month. Plus, your extra interest charges over the course of 30 years end up adding right around $150,000 to your bill.

So although home loans for bad credit exist, it doesn’t mean you should go for it. Instead, you might be better off taking the time to improve your credit situation. Then you can apply for a mortgage once you’ve built up a credit history that allows you access to the best possible rates.

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