If you have bad credit, you may fear rejection when applying for a mortgage. While certain types of home loans require a minimum credit score, there are lenders who will work with applicants with less-than-stellar credit. Want to know how to get a mortgage with bad credit? Start by learning what each credit level means and how your credit score may affect your chances of homeownership.
Levels of Credit Scores
300-500: Poor Credit.
Applicants with credit scores in this range will have a more difficult time trying to get approved for a mortgage. There are several reasons for having a score under 500 with the most common being bankruptcy. Delinquency more than 75 percent of the time can also result in a bad credit score. While it is not impossible to get a mortgage with bad credit, it will require you to jump through extra hoops and will come with strings, such as higher interest rates.
500-700: Fair Credit.
Individuals in this credit level range may be eligible for a mortgage, but interest rates may be higher than for someone who has a better credit score. This credit level is considered subprime and can occur due to financial issues like delinquency more than 50 percent of the time. Credit scores closer to the 700 mark are considered acceptable and less risky, meaning more likely to be approved.
700+: Good Credit.
Credit scores over 700 are considered good. Borrowers in this range will likely be approved for a mortgage and with good interest rates. Due to the unlikelihood of the borrower being seriously delinquent in the future, lenders are more comfortable giving out larger amounts of money with a lower down payment. As you get closer to the 800 mark, you are considered to have ‘excellent’ credit and will likely be greeted with swift credit approval.
Getting a Mortgage with Bad Credit
Everyone falls on hard times. When your hardships affect your credit score, it is difficult to attain the credit needed to achieve your dream of homeownership. Before you lose hope, know that it is possible to get a mortgage with bad credit. If you want to know how to get a mortgage with bad credit, consider these options:
Find a co-signer
While you may not be able to get a mortgage on your own, you might be able to with a co-signer. Before signing on the dotted line, remember that when you have a family or friend co-sign you are essentially putting them at risk for acquiring your debt in the event that you miss your payments.
Put down a bigger down payment.
One thing you can do to lower your risk in the eyes of a lender is to put down a large down payment. Providing a sizable amount of cash upfront shows the lender that you are serious about buying a home and that you have the funds to pay them back. If you put down a minimum of 20 percent, you can also avoid having to pay private mortgage insurance.
Increase your credit score.
While you may be anxious to buy a home, waiting until your credit score is higher can increase your chances of approval and reduce your interest rates. Even a small increase in your credit score can make a difference. Start by disputing any inaccurate information on your credit report. If possible, work on paying off your debt to improve your score.
Consider an adjustable-rate mortgage.
With bad credit, the interest rate on a fixed loan will be exponentially high. While adjustable-rate mortgages are more complex, they can help you avoid long-term high interest rates. Of course, there is a risk that your interest rate with an ARM will also increase. If the length of the loan is short, this is less likely to happen.
Get approval by the FHA.
As conventional home mortgages are typically not available to those with bad credit due to the higher risk, many people seek assistance through the FHA program. The Federal Housing Administration (FHA) does not lend out money but does act as a form of insurance providing lenders with a guarantee that they will get paid even if you default on your loan. This can improve your odds of getting approved.
While credit plays a vital role in your ability to secure a mortgage, it is not the only qualifying factor. To see if you qualify for a home loan, contact Fairfax Mortgage today. We offer a wide range of home financing services to help you obtain the credit you need to purchase your dream home.