Mortgages For Bad Credit
In this guide, we will cover buying a house and qualifying for mortgages with bad credit. We all know that we can fall behind financially despite our best efforts and intentions. There are sometimes things that are beyond our control and throw the balance off. Bad credit happens to the best of us. There are instances where people lose their jobs and/or businesses due to economic factors. We will cover qualifying for mortgages for bad credit.
Traditional and Non-QM Mortgages For Bad Credit
We will go over the traditional and non-QM mortgages for bad credit options homebuyers have to choose from for owner-occupant, second homes, and investment properties. The team at Non-QM Mortgage Brokers has no-doc and DSCR mortgages for bad credit options for primary and investment properties. It is more than possible to buy a house with bad credit and how qualify for mortgages with bad credit and lower credit scores.
How Did COVID-19 Affect The U.S. Economy
When the pandemic hit on February 2020, millions of Americans were laid off or permanently terminated from their employment. People in the restaurant and hospitality business got especially hurt. With a disruption in income, you will not have the funds to make your minimum monthly debt payments which will affect your credit. In the following paragraphs, we will discuss buying a home with bad credit and the mortgage options homebuyers have. One of the options that are popular is non-QM loans for bad credit.
More Than Half of Americans Live Paycheck To Paycheck
It is estimated that between 64% and 77% of people live paycheck to paycheck. This means that the paycheck only gets them through until the next pay. Contrary to popular belief, this is not just low-income individuals and families. Nearly one in ten workers making over $100,000 a year also live paycheck to paycheck.
Half of Americans Struggle With Savings
One in four workers also do not or can not set aside a saving fund each month. This can be stable for the short term, but if an occurrence happens and there are unexpected expenses or loss of income, people are on the verge of big financial trouble. A person could experience unexpected hospital bills, layoffs, unexpected home repairs, death of a contributing financial family member.
Bills get missed, foreclosures occur, and in some instances, people must file for bankruptcy. Once you start falling behind on payments, missing payments, or taking out extra credit, it won’t take long for your credit to reflect this.
How The Coronavirus Outbreak Affected Debt Levels of Americans
This was especially prevalent during the Covid-19 pandemic. Although the labor force has regained many of its employees, the unemployment rate is still near 8.4%. People ran through whatever savings they had, and basically, individuals were not financially prepared for the job losses they experienced.
Often, this would be multiple people within the home. The jump from people who earn over $100,000 and still live paycheck to paycheck jumped during the pandemic went from 10% 10 18%. Due to job losses from the pandemic, 2.3% more individuals ran up additional credit card debt.
Credit Score Requirement For Buying a Home With Bad Credit?
One of the most frequently asked questions at Non-QM Mortgage Brokers is what the Credit Score needed to buy a home. Different types of mortgages require other credit scores as their baseline. The absolute best credit score a person can have is 850. Most credit scores range from 300-850; the higher, the better. In order to get the best mortgage rates, home buyers should aim to have a score of 760 or higher. Even though lenders prefer to work with a higher credit score, some lenders specialize or offer programs to those with less favorable scores. Keep in mind that the price you will pay for working with these lenders is a higher interest rate.
What Is The Lowest Credit Score Needs For Mortgages For Bad Credit?
A qualifying mortgage requires a credit score of 620. A QM loan (Qualifying Mortgage Loan) is a loan based on requirements set by Fannie Mae and Freddie Mac. Congress developed these federally-backed home mortgage organizations to ensure that the nation’s mortgage industry was stable, liquid, and affordable.
Qualified Mortgages For Bad Credit
These are entities that buy mortgages from lenders and either package the loans into mortgage-backed securities to sell or hold the loans in their portfolio. Freddie Mac and Fannie Mae have sets of guidelines and rules that lenders must follow in order to loan out qualified mortgages. Because borrowers are required to fit into these specific guidelines, it is considered a low-risk mortgage.
Non-QM Mortgages For Bad Credit
If you do not meet these guidelines, you would need to apply for a non-QM loan, a non-qualifying loan.
A Jumbo Loan is a loan that exceeds the maximum loan amount limits set by the Federal Housing Finance Agency. The Conventional Loan Limit is $647,200 in most areas of the country. However, in high-cost areas, such as Hawaii, it is higher. The limit depends on the county you live in. Because these loans are not eligible to be insured by Fannie Mae or Freddie Mac due to their guidelines, lenders take on more risk. In order to secure a Jumbo Loan, you will need a minimum credit score of 680.
FHA Mortgages For Bad Credit
An FHA Loan is a loan that is insured by the Federal Housing Administration (FHA). FHA loans have been proven to be the best mortgages for bad credit. FHA loan can offer mortgage loans for those with lower scores because lenders have insurance from the FHA. Borrowers with a higher score will have lower down payments. If your credit score is 500, you will need a 10% down payment. If you have a minimum score of 580, you will only need a 3.5% down payment. If you have experienced a foreclosure, you will need to wait three years before you are eligible for an FHA loan.
VA Mortgages For Bad Credit
A VA loan is a loan insured by the US Department of Affairs and for eligible members of the military and their spouses. The VA does not set minimum credit score limits, but it is up to the lender. Most lenders will want you to have a credit score of 620 or more, and you don’t usually need a down payment with a VA Loan. If you’re going to try to qualify for a VA loan and you have had a foreclosure, you must wait at least two years.
A USDA Loan is a loan that the US Department of Agriculture insures. This loan doesn’t require a down payment and is meant for low or moderate-income buyers. Again, this is up to the lender, and most will require a credit score of 640 or higher. Like an FHA loan, you will need to wait three years after a foreclosure to be eligible for a USDA loan.
How to correct credit issues
- Check your credit report. It is essential that you review your credit report and see what areas you need to improve. This means more than just knowing your credit score; you will actually need to look through the report. There are three major credit bureaus. These are Equifax, Experian, and TransUnion. If there are errors on your report, you can dispute these errors. You report them to Credit Reporting Bureau. Incorrect instances on your credit report do happen, which can signal identity theft or even mistakes. Correcting issues can take time, but it is worth it.
- Pay your bills on time. Whether or not you have paid your bills on time or if you have missed payments is one of the most significant factors in your credit score. Although this is probably what has affected your score in the first place, the less frequent it has happened and the length of time that has passed since you have missed or had delinquent payments, the better it is. If you are struggling to keep up with your bills, you can also contact your lenders and discuss options with them for catching up. More often than not, a lender will work with you in order to continue receiving payments.
- Become an authorized user of someone you trust with good credit. This would allow you to make purchases on their credit card, but you would not actually need to do that to reap the benefits. As long as the credit card remains in good standing, their use of the card and timely payments can help improve your credit.
- Get a secured credit card. This functions much like a regular credit card, but it requires you to put money down as a security deposit. The good side of this is that most secured credit cards report your status to credit bureaus. If you are making payments on time and using the credit card with restraint, it should positively impact your score.
- Credit Card Utilization- Credit bureaus look to see if you are keeping your credit utilization below or about 30%. It’s important to not overspend on credit and leave some of the credit open. It would be best if you tried to pay off some of your credit card debt.
- Do not close old credit cards. Although, in theory, it seems like this will help you lower your credit score, it can have the opposite effect. Credit history length can account for 15% of your score.
- Limit new inquiries. Every time that you apply for a new credit card or credit increase, an inquiry is made. A soft inquiry will not affect your credit score, and these instances include when you check your own credit, an employer checks your credit, or a credit card company preapproves you for offers.
- Applying for new credit, such as car loans or a new credit card, is considered a hard inquiry. Hard inquiries show up on your credit.
- Bankruptcy can stay on your credit for up to 10 years. There is not much that you can do about this other than showing responsibility and staying on track after the fact. Remember that the longer timeframe that has passed since the bankruptcy, the better it is. The time usually starts ticking when the bankruptcy has been discharged and not when you filed it.
- A foreclosure will stay on your credit report for seven years from the date that you missed the first payment. Like bankruptcy, you can’t do anything to get it off your report, but you can work to get things back on track since that time. A non-prime loan is a possibility after experiencing foreclosure. These lenders will charge more interest, and the down payment is often 25% or higher. There are exemptions that you can get after experiencing a foreclosure. These are called extenuating circumstances. Some of the eligible reasons for this would be job loss, serious illness, loss of a wage earner (death), or serious medical issues.
If you have experienced both a foreclosure and bankruptcy, the time starts with whatever occurred last.
How long does it take to rebuild your credit?
There is no black-and-white answer for this. It depends on what your score is and what issues are on your report. It may take some time; however, it pays off when you want to apply for a mortgage.
Best Way to Qualifying Mortgages For Bad Credit
At this point, you may be starting to see that there are options for those who have had some credit issues in the past. You know what the lenders are looking for and how to work on correcting some of the problems.
Lastly, it’s vital that you spend time looking for a lender who specializes in the mortgage that will best accommodate your needs, specifically those with poor credit or bankruptcy and foreclosures. THE CFBC reported that nearly half of consumers don’t shop around for the best rates and fees when selecting their mortgage. This is most likely due to being non-educated on the options available to them. Even half of a percent can add up to thousands of dollars over your loan term. You can ask your family and friends for recommendations, especially if they have a similar financial situation as you do.
Best Lender Options to Get Mortgages For Bad Credit
You could also consider enlisting the assistance of a mortgage broker. This is advisable when you have a lower credit score or other financial issues instead of trying to find the right loan offers on your own. These professionals are the go-between lenders and borrowers, working on getting the borrower approved. They have experience in programs and products that assist people with the right mortgage loan.
Working With Mortgage Brokers versus Mortgage Bankers
Working with a mortgage broker can help you save time, effort, and long-term money expenses. Ensure, when you are shopping for a mortgage broker, that you are also comparing brokers. Just like lenders, it may take time and some education to find the best one for you. Keep in mind that you may owe a mortgage broker fee, which may be covered by the lender or buyer.
Non-QM Mortgages For Bad Credit
A Loan Officer is different than a broker and works for the lender. They are suitable for informing you about what loans are offered by the lender, helping you get started prequalified, and assisting with the application process.
In summary, millions of people have issues with their credit and history. This does not mean that they can’t get approved for a home mortgage loan. Sometimes, people are embarrassed by their credit history, which can put them off seeking a lender to get a mortgage. It does not have to be this way. There are lenders and programs that exist to help even those with severe credit issues and hardships. Do not give up on your dream of owning a home without looking for that perfect lender who will help you.