Many lenders have strict qualifying requirements for mortgage loans, which can make it challenging for borrowers with bad credit to obtain a mortgage. However, if you're a would-be homebuyer looking for the best mortgage lenders for bad credit, there are options out there. A lot of mortgages for poor credit are loans backed by government agencies including the Federal Housing Administration (FHA), the Veteran's Administration (VA), or the U.S. Department of Agriculture (USDA).
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While some lenders make conventional loans to homebuyers with bad credit, you will often secure more affordable financing if you get a poor credit mortgage insured by a government agency. These mortgages not only have relaxed credit requirements but also require lower down payments than most conventional mortgages.
There are three primary options for government-backed loans that could be available to borrowers looking for bad credit mortgage loans.
FHA Loans are issued by private lenders but backed by the Federal Housing Administration. You can qualify for one with a credit score of 580 and a down payment of 3.5% or with a score as low as 500 and a 10% down payment. There are no minimum income requirements, although lenders must determine if the would-be homeowner has sufficient income to repay the loan.
VA Loans are also issued by private lenders, but this time the Veterans Administration guarantees the loan rather than the FHA. There is no minimum credit score requirement imposed by the VA. There's also no down payment required unless the home appraises for less than you're paying for it. You do need to be a service member or have a record of military service, although surviving spouses of servicemen and women are also eligible.
The USDA offers two programs for would-be homebuyers. Section 502 Direct Loans are made by the USDA directly and are open only to borrowers with limited incomes who are buying properties in rural areas. The USDA also guarantees loans to borrowers with low incomes, although the income limits are higher for these loans made by private lenders. No down payment is required for USDA loans, interest rates are often below what you'd be charged on a conventional loan, and you can qualify even with imperfect credit.
While you can get a mortgage with poor credit, your mortgage will be less expensive and you'll have a broader choice of lenders if you raise your score. There are seven simple steps you can take to help you rebuild credit.
It is possible to buy a home with a low credit score. Your best option may be to search for an FHA or USDA loan as these government-backed loans tend to be easier to qualify for and often offer the most affordable loans to bad credit borrowers.
In most cases, you will need to make at least a small down payment to buy a home, especially if you have bad credit. If your credit score is at least 580, you may be able to qualify for an FHA loan that enables you to make a down payment as low as 3.5%.
If you're buying a home with a low credit score, here are the key steps you should take:
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