Can You Qualify for a Mortgage with Bad Credit

Whether you defaulted or were constantly late with loan payments in the past, doesn’t necessarily mean that you’re going to mismanage a new mortgage loan. Some loan companies have realized this and are much willing to avail avenues for acquiring a mortgage with bad credit.

Is a FICO score of 600 bad?

Having a FICO score between 580 to 669 points means you’re a subprime borrower.  Much emphasis is placed on the score because it gives a quick overview of the credit behavior and credit experience of the borrower. That’s because credit scoring models factor in several things when generating this score, such as credit mix, history of payments, etc.

Traditional lenders exclude subprime customers as this group defaults more than prime or subprime borrowers. Currently, banks have to minimize risky investments because the cash used comes from customer saving accounts.

Income, debt, alternative data

So how can you get a home loan with bad credit? Credit scores are just one of several things a lender considers. They will be interested in other indicators, including:

• Income – Do you receive a paycheck on a monthly, weekly or biweekly basis? Is your source of income stable? How long have you been employed at your present job?
• Recurring bills – Do you pay rent or utility bills punctually? Are any bills in collections? Answering these questions might help the lender assess your ability to prioritize mortgage payments versus other expenses.
• Amount of Debt – Having a large debt from auto loans or personal loans may mean that you’re currently weighed down by debt and have no room for more.
• Alternative data – Some FinTech companies use alternative data, for instance, your profession or level of schooling when gauging creditworthiness.

How to Qualify for a Mortgage with Bad Credit (Basics)

1) Proof of Income

Having income that’s verifiable is essential. The first loan form you fill out for home loans for bad credit will require you to state your earnings per month. During the mortgage underwriting and verification process, anticipate a request for documentation, including copies of pay stubs, bank account statements for the past 90 days, or W-2 tax forms.

The self-employed generally have a harder time assuring lenders that their income is consistent and reliable. They submit 1,040 tax returns. Do you run a small business? It’s advisable to pay yourself a salary (w-2 wage) and track all expenses & revenues diligently.

Can you get a mortgage with bad credit without sufficient proof of earnings? Probably not because it’s what the lender is basing their lending decision heavily on.

2) Debt-to-Income Ratio

According to past evidence, borrowers having high debt-to-income ratios struggle more with their monthly payments than customers with lower DTI ratios. It’s understandable because having a high DTI ratio means that a high proportion of your income goes towards your debts and fixed bills, such as rent or child support.

After qualifying for a bad credit mortgage, your DTI ratio should not exceed 43%. However, it’s better if the ratio does not exceed 30% when the monthly repayments are factored in. There are strategies to lower the DTI:

• Increase income: Lowering the standard of living is not a solution many people can take even when they are urgently figuring out how to get a home loan with bad credit. So it’s wise to find strategies to increase your earnings like working in the gig economy.
• Pay down loans: Think of how to reduce what you owe. For instance, if you have several loans, consolidate them and pay one lower payment. Clear revolving debt. Ensure you clear any bills that have gone into collections.
• Spending less: It’s also a good move to decrease your fixed monthly obligations. Living below your means, sticking to a budget, saving and investing, makes you appear as more financially disciplined.

3) Professional Appraisal

If the borrower stops making payments for 3 to 6 months, the lender may start foreclosure proceedings. The home ends up back on the market, during the foreclosure auction. The lender expects the home to sell at market value or for an amount that allows them to recoup the remaining loan principal.

It’s very important for the property to be evaluated by a professional property appraiser before the housing loan with bad credit is processed.

4) Preliminary qualified

After knowing how to get a mortgage with bad credit, don’t check listed properties yet! Instead, approach a lender and ask to be preliminary qualified. Some realtors may not show you properties on the market without a pre-qualification letter.

Is it hard to get preliminary qualified for bad credit mortgage loans? Certainly, not. You just fill out an application form. The information you have provided such as your monthly income is then used to arrive at the preliminary decision. The pre-qualification letter expresses the lender’s interest, and it states the max loan amount and rate.

Finding properties within your budget range then becomes effortless. It’s also easier to negotiate knowing that there is funding available if you decide to buy a property. You also avoid the disappointment that comes with finding a house you like, only later to realize that you’ll have to let it go for failure to secure funding. A pre-qualification letter doesn’t guarantee to fund and might be valid for 2 to 3 months.

Where to Find Home Loans for People with Bad Credit

1) Special Programs

Imagine these terms on a bad credit mortgage loan: no downpayment, 15-year or 30-year fixed rates that are below market rate, no costs of closing, and no fees.

It’s made possible thanks to the non-profit organization, Neighborhood Assistance Corporation of America (NACA). They have partnered with Bank of America, and hold events titled, “Achieve the Dream” in various U.S. cities.

When you attend, you can get approved in a single day. NACA loans don’t require the backing of mortgage insurance, unlike other bad credit mortgage loans. Getting approved is quite possible as 90 percent of the people who go through their program, get accepted. Their ultimate mission is helping people locked out of homeownership, and they are doing this by looking at your character, not scores.

2) Federal Housing Administration (FHA) Loans.

Working with FHA-approved lenders may help you obtain home loans with bad credit, specifically suited for low-income and subprime borrowers.

There are some requirements, though. You must live in the mortgaged property and prove that you’re employed with steady wages. Down payments are based on the applicant’s credit score range.

• (500 to 579) upfront payment is 10%
• (580+) a down payment is 3.5%.

3) Find Lenders for Mortgage with Bad Credit

Not every lender grants a home loan bad credit. Banks nowadays operate under tighter restrictions following the subprime mortgage crisis of 2007. Fortunately, there has been a proliferation of alternative sub-prime lenders. Some offer an online application process that’s smoother and faster.

4) Co-signed Loans

Do you know someone with a near-perfect credit score and stable employment income? Are they related to you or share a very close personal relationship that they can be considered part of your family?

If so, a traditional mortgage is not out of your reach. Just find them and convince them to make a joint application, though their name will not feature on the title of the house. They are useful in boosting your status and taking on the monthly payments should you stop making them.

Sharing a family relationship is not enough as some lenders only accept the co-signer if they live in the same state as you or even in the property. Convincing someone to co-sign a loan has to be a well-thought-out decision because the co-signer is legally bound to the agreement until the mortgage is paid off. It might hurt their chances of receiving more credit as this agreement will be noted in their credit reports.

Implications of Mortgage Loans for Bad Credit

Mortgages for bad credit, of course, come with a few disadvantages. Since you pose more risk the lender demands a higher upfront fee. Low-risk borrowers enjoy a rate of 5%. So if the house sells for $500,000, the upfront fee is just $25,000.

High Downpayment

The downpayment for riskier mortgages ranges from 10% to 25%. For instance, if the mortgage is worth $50,000, a downpayment of 20% implies paying $10,000 upfront. Most often, lenders don’t want you to obtain your downpayment from a loan, so start saving or plan to liquidate your assets.

Extra Fees

Several fees are charged on top of the downpayment like the origination fee that’s between 0.5% to 1%. Your origination fee might be 1% if you’re a subprime borrower.

In addition, expect the mortgage broker to charge you a fee. Normally, the broker receives a commission from the lender for bringing in a prime or subprime customer. But the commission might be scrapped if they source customers with bad credit. Consequently, you’re charged the brokerage fee that’s up to 1% or 2% of your total mortgage.

If you were asking “can you qualify for a mortgage with bad credit,”  the answer is a solid yes.