Home loans: What classifies as a bad credit home loan?
There are a few different types of home loans, but if your credit isn’t that good, you may feel as if you won’t qualify. Fortunately, you can purchase a home with bad credit. The key is in knowing what bad credit home loan lenders look for, and what you need to do.
Just like a regular home loan, bad credit home loans start by evaluating your FICO score. If your score us between 500 and 570, you can consider that to be bad credit, but mortgage lenders look for more than just a credit score. Here are additional factors that will be evaluated when qualifying for bad credit home loans:
- Consistency in income
If you’ve been on your job and have had steady income for at least two years, this shows you have stability, which is key in what lenders are looking for.
Lenders want to see that you have been saving your money and have the funds to contribute to the down payment. Even if you don’t have all the money, at least you have a history of saving.
- Debt vs income
How much debt do you have? The lower your debt, the better your chances of lenders seeing your ability to make your mortgage payments and on time.
These factors demonstrate you will be a good risk and the lender should take a chance on you. It’s always a good thing to improve your credit score by paying debts on time and carrying low balances on your credit cards.
What types of bad credit home loans are there?
There are three options backed by the government that can assist people with bad credit. The first is the USDA loan, which offers 100% financing for rural properties. Veterans can also get 100% financing with flexible credit and no property location restrictions.
There are criteria you must meet, and you have to prove you can afford the housing payment. The last one is FHA. For this one, your down payment of 3.5% can be a gift. This means relatives or someone else can gift you the money if you don’t have it.
How to obtain a bad credit home loan
Once you know all the options available to you, you must consider whether going the route of homeownership is really what you want to do. Things may not come easy, but with a little work, you can be successful. Here are a few things to remember:
- Explanations work well
Be prepared to explain all the inconsistencies in your financial history and the reasons for your poor credit history. Be honest and upfront, providing all the intimate details. Lenders want to know what they are dealing with. As long as you can provide documentation to back up your explanation, you will have a better chance.
- Always work on your credit
Be consistent in payments and keep working on your credit. Keep your debt low and things will improve over time.
- Evaluate the lender
Shop around for a lender who is willing to work with you and keep your options open.