Can You Get a Home Loan With Bad Credit?

Can you get a home loan with bad credit? Find out the answer here. You may be able to afford your dream home sooner than you think!

Creditworthiness is a gift that keeps on giving. With excellent credit, you’re more likely to get approved for the best interest rates, loans, and even certain types of employment.

But when applying for a mortgage loan, credit scores don’t always tell the whole story.  Can you get a home loan with bad credit?

In some cases, yes. Take a look at this overview of what it takes to get bad credit home loans.

Loans for Bad Credit

Borrowers with low credit scores fall into a category called subprime. Subprime means you are a potential high risk to lenders.

Typically, your credit score must be below 620 to be considered subprime. But there are exceptions. You might also be considered subprime if you don’t have a job or any assets to claim on your mortgage loan application.

If your credit score is below 600, you’re considered a risky borrower no matter your income level. You might still qualify for loans, but you’ll need to take a different route than a conventional loan to prove you can repay it.

How to Get a Loan with Bad Credit

When you can’t prove your creditworthiness using your credit score, be prepared to demonstrate your commitment to repay the loan using more stringent methods. For example, you might show a larger amount of cash reserves or offer a bigger down payment.

Your cash reserves are kept in a savings account during closing. From the lender’s perspective, it’s the money you have to use in an emergency such as after the loss of a job. It’s helpful to make your cash reserves cover a longer time frame when you have bad credit.

You’ll need to also meet the standard criteria of having a low debt to income ratio. This means that you owe very little in comparison to the amount of money you make each month. On conventional loans, lenders want to see a debt to income ratio of below 30 percent.

To lenders, having a low debt to income means you can afford your monthly mortgage payments because you aren’t already overwhelmed by debt. Low debt with a low credit score helps improve your chances of approval for a bad credit home loan.

Who Offers Bad Credit Home Loans?

Not every lender wants to offer loans to borrowers with bad credit. But your options for finding a loan are better than you think.

Federal mortgage programs allow borrowers with bad credit to apply. These loans include FHA, VA, and USDA mortgage loans. You might also find home buyer programs available in your local municipality or state that include low credit borrowers.

Federal mortgage loans are great for first time home buyers with low incomes. FHA mortgages require as little as 3 percent down on a home to qualified borrowers.

VA loans are only available to veterans, service members, and eligible surviving spouses. The loans don’t come directly from the Veterans Administration.

Instead, private banks provide the loan but the loan is backed by the VA in case the borrower can’t pay it back. The federal backing makes lenders more willing to offer loans to borrowers with bad credit.

If you’re interested in a VA mortgage loan, get a quote at

What Are the Disadvantages of Bad Credit Loans?

The main disadvantage of bad credit home loans is the interest rates and terms. Federal loans may allow subprime borrowers to participate, but there are limits.

You’ll need to get private mortgage insurance if you put down less than 20 percent on your mortgage loan. This tack on an extra couple hundred dollars onto your mortgage payment each month.

The other downside to bad credit loans is that you won’t qualify for competitive interest rates. Most people rush to buy homes when interest rates are low.

They are low only for borrowers with good to excellent credit. If your credit is questionable, you need not rush through the home buying process because you aren’t going to get the best mortgage terms available on the market.

Consider whether now is the best time to buy a home if you’re hoping for the lowest interest rate. A house is the largest purchase most people make in a lifetime.

If you’re hoping to buy your forever home, or the house you’ll retire in, make sure you’re getting a deal that works for your budget.

Can You Get a Home Loan with Bad Credit?

There are a variety of home loans available no matter your income level or creditworthiness. However, you can’t be missing all aspects of your financial profile and still expect approval.

If you don’t have credit, aim to show a stable income. If you don’t have any assets, work to improve your credit rating. A strong financial profile, or creditworthiness, gives you options.

Working to raise your credit score even by 50 points can completely transform your loan options. Raising your credit score is easy with a consistent plan in place.

Here are a few things to look out for when looking for a quick credit score boost.

  • Payment History –┬áKeep all your payments on time while trying to apply for a mortgage. The longer you pay on time, the more your credit score will increase every month.
  • Credit Utilization –┬áDon’t carry a balance of more than 30 percent on any of your credit cards at once. This makes your credit utilization higher and ruins your credit.
  • Length of Credit History – Keep all credit accounts open as long as possible to show a long and strong financial history.
  • Types of Credit – Diversify the type of credit accounts you own e.g. auto loans, credit cards, and/or personal loans.
  • New Credit Inquiries – Limit the number of new accounts when you’re planning to get a mortgage loan. Too many inquiries to borrow money look like a cry for financial help.

Be patient while you work to improve your score. Some scores jump 100 points right away while others can take up to a year to get there.

Finding the Right Mortgage Loan

Can you get a home loan with bad credit? Absolutely.

Just be sure to consult with a loan professional to understand all your options before moving forward. Ask about various loan scenarios to decide whether you should wait a few months to boost your credit score or move forward now.

Mortgage brokers have the expertise to help you get your financial profile in top shape before going through underwriting. For more information and lifestyle tips, visit our blog for updates.

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