Having bad credit doesn’t always have to stop you from buying a home. If you have a steady income that allows you to make a monthly mortgage payment, you may be able to get an FHA home loan even with bad credit.
There are several pieces of your financial health that a lender will look at, but there are options for those with credit challenges. Working with a mortgage broker is the best choice for finding a home loan package that will work for you.
At TwinCity Lending, you can learn how to get a home loan from our lending specialists. Contact us to learn more about the options we offer.
Will an FHA Home Loan Help You Buy a Home?
The Federal Housing Administration (FHA) provides financial backing to qualified consumers. The FHA is not the lender for your home loan. Instead, they insure the loan so that lenders are willing to extend credit to borrowers who don’t qualify for traditional mortgages.
This program offers potential buyers the chance to secure a home loan even if they do not have a high credit score or a large down payment.
A conventional mortgage typically requires a buyer to have up to a 20 percent down payment to purchase the property. It also generally demands credit scores of at least 700 to secure a home loan with the best interest rates. FHA loans are different.
The benefits of an FHA loan are numerous. They can include:
- Lower interest rates on the home loan you secure
- Reduced closing costs
- Lower down payment requirements
- Improved access to credit with lower application requirements
- The ability to purchase a more expensive home due to the lower interest rate
Every situation is different. Even if you have bad credit, you may qualify for an FHA loan so that you can enjoy the benefits of homeownership.
What Are the Eligibility Requirements for an FHA Loan?
There are a few things you need to know about how to get an FHA home loan. Not everyone with bad credit will qualify. Those who wish to buy a house using this type of loan still need to provide proof of income to show they can make a consistent monthly payment.
To obtain an FHA loan, you must have a minimum credit score of 500. If your number is higher than this, you may qualify for additional savings opportunities. If you have a credit score of at least 500, you may be eligible to borrow up to 90 percent of the home’s sale price. This opportunity means you would need to provide only 10 percent as a down payment.
Some borrowers who have a score of at least 580 may benefit for additional financing opportunities. Your down payment requirement drops to just 3.5 percent at that point.
In addition to credit score expectations, other requirements exist. You will need to show:
- Proof of consistent, adequate income
- A debt-to-income ratio that is within the lender’s range
- Proof that the property is in good enough shape to qualify
Your TwinCity broker will help you learn if you’re eligible to get a home loan using the FHA program. We can answer all of your questions about the requirements.
What If Your Credit Score Isn’t That High?
As noted, FHA does not provide home loans. Traditional lenders do. That means you still must meet the lender’s standards for borrowing money.
The FHA backing offers protection to the lender since it is riskier to provide a loan to someone with poor credit. Should you default on the loan, the FHA will pay the lender for their losses. Thanks to that financial protection, the lender is willing to extend you a mortgage at a reasonable interest rate.
If your credit score is lower than 500, the FHA may not be willing to approve your loan application. That means lenders would face a significant risk. This risk will likely mean they will not offer you a home loan. If you have a sub-500 credit number, consider following these tips for improving your credit score before you try to secure a mortgage.
Pay Down Your Debts
Instead of using credit, make purchases with a debit card or cash. Focus on paying down or eliminating consumer debt to lower your debt-to-income ratio. This ratio is a significant piece of the lending picture. If you have too much debt compared to your income, a lender will not risk extending you a loan.
Check Your Credit Report
You can get a free copy of your credit report every year from each of the three credit bureaus. Take advantage of this service and check that everything on your credit report is up-to-date and accurate. Errors will lower your credit score, so address them quickly.
Make On-Time Payments
One of the most significant impacts on your credit score is your ability to make payments on time. Use auto-pay features with your utilities and credit card companies to make sure the payments are never late.
Avoid Opening New Lines of Credit
When you are preparing to seek an FHA home loan, or any mortgage option, don’t open new lines of credit, such as new credit cards. Even if a new credit card has a zero balance, it raises a red flag to lenders. It is potential debt, and it gives them pause.
Consider Debt Consolidation
There are no legitimate companies that can repair your credit for you. Instead, ask your lender if there are options for consolidating your debt to pay it down faster. You might want to seek help from consumer credit bureaus as well. And once you do secure an FHA home loan, the TwinCity experts can explain how to use your home equity for debt consolidation when the time is right.
Ready to Apply for an FHA Loan?
As you work with a lender to determine if you qualify for an FHA home loan, continue to make all the right financial moves:
- Build up your down payment.
- Create a budget and stick to it.
- Pay down your debt.
- Consider adding new income, if possible, to help boost your ability to qualify.
If you want to learn how to get an FHA loan or to learn about applying for any home loan, contact TwinCity Lending. Our team can help you to find a mortgage package that will work for you, even if you have less-than-perfect credit. Reach out today to schedule a no-obligation consultation with our team.