Can I get a Mortgage with Bad Credit?
A lot of people ask if it’s possible to get a mortgage with bad credit, the answer is yes! Your dream of owning a home shouldn’t be hindered by past credit issues. Below are mortgage options available to anyone with a credit score of 500 or above.
Getting a Mortgage with “Bad Credit” - Traditional Financing Options
Did you know that some traditional mortgage options only require a 500 credit score? Both FHA and VA home loans offer financing options for anyone with a credit score of 500 or above. Unfortunately, many lenders who offer these home loans will not lend money to anyone who has a credit score below 580. Those companies believe that the risk of lending money is too great when credit scores are below 580. Luckily Wasatch Mortgage Solutions can offer FHA and VA home loans to anyone with a credit score at or above 500.
Requirements to get a mortgage with “bad credit"
500 Credit Score - 10% down payment (can be gifted)*
580 Credit Score - 3.5% down payment FHA loan (can be gifted)**
OR - 0% down payment VA loan***
* - 10% down payment, 30 year fixed rate mortgage, 5.062% Annual Percentage Rate (as of 10/20/16)
** - 3.5% down payment, 30 year fixed rate mortgage, 4.753% Annual Percentage Rate (as of 10/20/16)
*** - 100% financing, 30 year fixed rate mortgage, 4.145% Annual Percentage Rate (as of 10/20/16)
Portfolio Loans
Life happens, sometimes bad credit is the result of life events such as a foreclosure, short-sale, bad divorce, or medical bills pilling up. After one of these events occurs, you're usually required to wait a few years before you can qualify for a traditional mortgage. Portfolio loans provide a great alternative that let you bypass that waiting time, giving you the chance to own your dream home now.
So what is a portfolio loan? Portfolio loans are unique mortgage options created by lenders. Each portfolio loan follows the specific lender’s guidelines and does not adhere to the strict regulations that traditional mortgage programs must follow. For example, a traditional mortgage, such as an FHA loan, doesn't allow a bankruptcy within the last 2 years, but a portfolio loan will allow a bankruptcy.
Requirements for Portfolio Loans
620 Credit score - 20% down payment (can be gifted)*
580 Credit score - 30% down payment (can be gifted)**
* - 20% down payment, 30 year fixed rate mortgage, 4.630% Annual Percentage Rate (as of 10/20/16)
** - 30% down payment, 30 year fixed rate mortgage, 4.928% Annual Percentage Rate (as of 10/20/16)
Frequently Asked Questions
1. Why do bad credit mortgages have higher down payment requirements?
This question is related to risk. Lenders perceive a higher level of risk when working with lower credit scores. In order to minimize their risk, the lenders request a larger down payment. As the perceived risk decreases, so does the required down payment.
2. How long would it take to improve my credit score to 580 or above?
Improving your credit score actually means improving your credit history, which will then reflect in your credit score. The time it takes to improve your credit history depends on which events have caused it to drop. Larger events such as a bankruptcy or missed payments take longer to fix than small events such as closing an account or getting a new line of credit.
The following graph by VantageScore displays the average time it takes your credit to recover from different events. If you missed a payment 6 months ago, it will probably take an additional year for your credit to recover. If you closed an account 1 month ago, your credit could recover within a few months.
3. Will a co-signer help me qualify for a better rate?
Co-signers are not extremely helpful if you are trying to get a mortgage with bad credit. Mortgage approvals are based off of the lowest middle-credit score of all parties involved. So if your middle credit score is 547 and the co-signer’s middle score is 685, your score will still be used for approval decisions. A co-signer can be helpful if your income isn’t enough to qualify for your desired loan amount. Their income can supplement yours in order to get a larger loan amount.
If you have any other questions or want to understand how a “bad credit” mortgage could help you finance your dream home, please call us at 435-755-2177.
