Banks and other types of lenders will look at your credit when you apply for a mortgage loan. To qualify for the best rates and terms possible, you need “excellent” credit. That means you need to have a credit score of around 740 or higher.
Having “bad” credit or a credit score under 600 doesn’t disqualify you from getting a mortgage loan. Unfortunately, this may limit your financing options. That being said, “bad” credit mortgage loans aren’t necessarily “bad” loans.
FHA Mortgage
The Federal Housing Administration (FHA) mortgage loan is the most popular option for borrowers who have bad credit. This is because FHA loans have the lowest credit score requirements of any major mortgage loan program.
Most FHA-approved lenders only require you to have a credit score of 580, which is still a “bad” score. However, borrowers with lower credit (500-579) may still qualify if they make a 10% down payment.
With that said, however, what truly makes FHA mortgage loans popular is the fact that they don’t carry risk-based pricing. Sure, having bad credit will still impact the interest rate. But, interest “hits” on FHA loans are significantly less.
VA Mortgage
If you’re a qualifying military service member, veteran, or military spouse, then you may want to consider the VA mortgage loan. Not only does it have low credit score requirements, but it also offers 100% financing.
The Veterans Administration (VA) doesn’t set minimum credit score requirements. Typically, however, most VA-approved lenders require borrowers to have at least a credit score of 580. Meeting this requirement qualifies you for 100% financing.
Similar to the FHA mortgage loan, VA loans don’t have risk-based pricing. It also doesn’t come with mortgage insurance premiums. Unfortunately, you need a VA Certificate of Eligibility (COE) to qualify- which you need to apply for separately from the loan.
USDA Mortgage
The U.S. Department of Agriculture (USDA) mortgage loan is also a popular option for borrowers who have bad credit. This is because it doesn’t have down payment requirements and usually comes with low-interest rates.
That being said, among government-backed mortgage loans, it may be the hardest to qualify for. Especially considering that most USDA-approved lenders have a minimum credit score requirement of 640.
Only USDA-eligible properties can be financed using a USDA loan as well. This limits your housing options to rural or non-urban areas only. You also won’t qualify for a USDA mortgage loan if your household income exceeds 115% of the median income.
GSE Mortgage
Government-sponsored Entities (GSEs) are organizations that buy mortgages from lenders. This introduces liquidity into the mortgage market, making it easier for banks and other lenders to create more loans.
Some GSEs like Fannie Mae and Freddie Mac, however, offer their own mortgage loans. These loans are typically designed to increase homeownership among low-credit and low-income borrowers.
Two of these GSE loans are the HomeReady and the Home Possible programs. The minimum credit requirement for these mortgage loans is generally around 620. They also come with reduced mortgage insurance and down payment rates.
Non-Qualified Mortgage
Most mortgage loans follow a set of rules set by the federal government to limit high-risk mortgages. However, some lenders, specifically ones who don’t sell their loans to investors, can set their own requirements.
Non-qualified mortgages (Non-QMs) have very flexible credit score requirements. In fact, the minimum credit requirements can go as low as 500 on some non-QMs. Unfortunately, these mortgage loans typically come with much higher rates.
The Bottom Line
You can have bad credit and still qualify for a respectable mortgage loan with few compromises. Unfortunately, finding a lender who offers “bad credit” loans will take some time and patience.
For this reason, it’s best to work on your credit before you apply for any sort of financing. Especially if you want to save tens of thousands of dollars in interest payments. Call us at 888-799-7267 to schedule a Free Credit Consultation.
