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How Do You Get a Mortgage With Bad Credit?

Having bad credit doesn't automatically disqualify you from buying a home, but it does make obtaining a mortgage loan more difficult. While getting approved for a conventional mortgage may be out of reach, government-sponsored programs like FHA loans and VA loans for veterans help people buy homes even with poor credit and smaller down payments.

Best Mortgage Types For Bad Credit

Trying to purchase a house with bad credit adds complications to a process that's already filled with appraisals, income reports and other paperwork. Mortgage lenders see your credit score as an indicator of how likely you are to make timely payments and fulfill the terms of the mortgage loan you're requesting. The best mortgage programs for applicants with poor credit scores are those designed to reduce the risk borne by the lender.

TypeDescriptionBest For...
FHA LoanMortgages with low down payments and low minimum creditBorrowers with credit scores at least 500
VA LoanZero-down mortgage guaranteed by the VAVeterans and active-duty personnel
Adjustable Rate MortgageMortgage with annual changes in ratePeople able to improve their credit
Cosigned MortgageStandard mortgage with more than one borrowerPeople with minimal credit history

FHA Loans. If you have a lower credit score, the easiest option is to shop for FHA loans. FHA mortgages can be found at most banks and major mortgage lenders. They are insured by the Federal Housing Administration, which will fully compensate a lender if a borrower defaults on his FHA mortgage. Although you only need a minimum credit score of 500 to apply, having a score under 580 will require you to provide a down payment of at least 10%. The most favorable FHA loans have down payments as low as 3.5%.

VA loans. VA mortgages are another option for veterans and military servicemembers. Although there's no minimum credit requirement, most lenders who provide VA loans look for scores of around 620 or better. Given that the average US credit score is 695, this represents a fairly lenient standard. If your score falls below 620, you may still find lenders willing to work with you if you're willing to modify the terms of your loan in other ways. For instance, a larger down payment is one way to assure the lender that you intend to follow through on your loan.

Adjustable Rate Mortgages. While anyone with poor credit should think about how to improve their score, it's particularly important for home buyers to plan ahead. An adjustable rate mortgage allows borrowers with low credit to obtain lower interest rates than they could on a fixed rate mortgage of the same size. However, ARM rates can increase after an initial period of several years, inflating your monthly payments and upsetting your finances. You should only choose an ARM if you're confident of improving your credit score and refinancing before your rate goes up.

Cosigning on a Mortgage. If you're a younger borrower that hasn't built up a significant credit history, having a parent or relative act as a cosigner can help boost your chances of securing approval. While this is similar to cosigning on a lease or rental agreement, cosigning for a mortgage loan involves much more money. This makes it important to think about whether your cosigner is comfortable with being held responsible for the full amount of your home loan if you lose your ability to make payments.

Refinancing With Bad Credit

Refinancing a mortgage with bad credit involves many of the same challenges that you'll face trying to get your first mortgage. Your interest rate may be higher and your loan may come with stricter conditions, but bad credit means accepting such drawbacks. The easiest way to lower your monthly payment or reduce interest rate is to wait until you've improved your credit score. Once your score goes up, you'll find it much easier to find refinancing opportunities that save you money on your mortgage.

If you have an FHA mortgage, the FHA Streamline Refinance Program requires no additional credit check, appraisal or income verification. However, you must be current on your monthly payments and show that you'll receive a net tangible benefit in the form of a lower interest rate or monthly cost. The requirement of tangible benefit means that FHA Streamline Refinance is usually only available if prevailing interest rates are lower than the rate on your current mortgage.

Other Ways to Get a Mortgage With Bad Credit

While credit is an important factor in securing approval for a mortgage, it's not the only variable that lenders consider. For instance, increasing the amount you offer as a down payment can help demonstrate to mortgage lenders that you intend to follow through on your monthly obligations as a borrower. If you're fortunate enough to know someone willing to be a cosigner for your mortgage, their added backing can also give lenders the reassurance they're looking for. But when it comes to mortgages, the most reliable strategy for beating bad credit is to refinance after you improve your score.

If you're married, you could consider applying for mortgages with the name of whoever has the higher credit score. While this allows you to keep the lower score from hurting the rates and fees you'll see in your quotes, it will also limit the size of your final loan. Lenders will calculate that amount based on the applicant's income alone, since the income from the spouse with the lower score won't be factored in. Still, the fact that lenders always look at the lower of two credit scores makes it a good idea for couples to consider applying with just a single name.

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