If you are ready to get started right away, Lending Tree might be able to help you with a quote. If nothing else, it will help you see where you currently stand so that you can make the improvements that you need to get into your home.
Home Loan Programs
There are a few great government programs that offer home loans for people with bad credit. Even better, they do not require huge down payments, so if you are thinking that you need 20 percent down, think again. Some of the programs can get you into a home with nothing down at all. Sound good? Let’s look at some of your home loan options.
FHA Loans
You have probably heard of FHA loans because of the low down payment. It allows you to purchase a home with as little as 3.5 percent down.
What you might not know is that you do not need good credit to qualify. With a down payment of 3.5 percent, you can qualify with scores as low as 580. If you have a score of at least 500, you can also qualify but you would need to bring 10 percent down.
Besides the limited credit requirements, you need a debt to income ratio below 43 percent and the home must be your primary residence.
USDA Loans
These are not loans for farmers, these are home loans that are designed to encourage populating rural areas. Don’t want to live in the country, no problem. The definition of a rural area is pretty loose and you could be just minutes of most metropolitan areas.
There is no set minimum credit score for this type of loan although the floor is usually set at 620 by most lenders with a few going as low as 580. Fairly low scores for a home loan that does not require a down payment.
The home to be purchased must be your primary residence and your household income can not exceed 115% of the areas median income.
VA Loans
If you meet the military requirement for a VA loan, you should definitely go for it. Low rates plus no required mortgage insurance makes these loans a winner in anyone’s books.
As far as credit goes, they are not as forgiving as other loans but most lenders will set the base score requirement at 620. Still a fairly easy score to obtain with a little work if you have bad credit.
Improving Your Bad Credit
If none of the programs above will work for you, you need to work on improving your credit score. To some, credit scores are a mystery but there is nothing secret about them. They are a simple mathematical score based on a few factors. Let’s take a look at the major factors involved and what improvements you can make to get your score where it needs to be to get your home.
Bill Payment History
If you have bad credit, chances are good that this is what is dragging you down. One or two 30 day late payment strikes can really take a toll on a score because this factor represents about a third of your score.
If you have some late pays, there is not much you can do with them except move on. You can try calling your creditors and asking them to remove the marks but this is unlikely to work.
Your best course of action is to pay your bills in a timely fashion from here on out. For a home mortgage, most lenders will want to see 12 months of on time payments.
Credit Utilization
This is the second biggest factor in a credit score. This is how much of your available credit you are using. If every one of your credit cards is charged up, that is holding your score down. Ideally you want to be under 30 percent for the best scores. Under 10 percent is even better, but if you take your ratio to below 30 percent, you are doing great. This means that if you have $2000 in available credit, you need to get your balance below $600.
The best way to fix this is to just start paying down that debt. Pay the minimum on every card except the one with the highest interest. Pay as much as you can on that one and then once it is payed off, move on to the next one.
Another way to improve this ratio is to get increases in your credit limit. If you have $1000 in credit with a $600 balance, your ratio is 60 percent. If you get a credit increase to $2000 with the same $600 balance, your ratio is now 30 percent.
Credit Age
This is the last major factor, although there are a few more like credit inquiries and types of credit.
The age of your credit is important. You want to be able to show a long credit history. If you have an old credit card, do not close it. That would lower decrease the age of your oldest account and it would hurt your score.
Also, be careful about opening a lot of new accounts. Many new accounts would lower the average age of your credit and that would also hurt your score.
Final Word
If your credit score is not yet where it needs to be, do not be discouraged. Home ownership is worth waiting for. Just refocus your energy on improving that credit score. Take it from bad to fair and you can get that home of your dreams.
