Do you find yourself driving around on weekends or on the way home from work, gazing wistfully at homes that are bigger, newer and more attractive than yours? Maybe you fantasize about living in such a house — until you remember that your credit score makes that highly unlikely, if not impossible. It’s a sobering thought, and it’s hard not to feel envious of people who aren’t troubled by such problems.
However, there is good news: That lovely new home may not be out of reach after all. The Federal Housing Administration (FHA) recently eased its credit score requirement, allowing mortgage borrowers to qualify for a home loan with a credit score of at least 500. That’s a remarkable development considering that since 2008, when all those subprime loans caused the economy to implode, a good credit score has been the number one essential of qualifying for a mortgage. Fortunately, a more forgiving environment among creditors and the availability of bad credit loan programs has given a lot of would-be homeowners new hope.
Here are some options to consider when you are applying for a mortgage online with bad credit.
FHA Loans
Generally speaking, a “bad credit loan program” refers to an FHA mortgage. The FHA was created in 1934 to jump start home ownership in an economically depressed America. Today, more than 80 years later, the FHA is still helping home buyers realize their dream. If your credit score is in the 500 to 570 range, you’ll need a 10 percent down payment; you’ll only need a 3.5 percent down payment if your score is at least 580. A larger down payment minimizes the lender’s risk and makes it easier for applicants to secure a loan.
Other helpful factors for getting a mortgage include:
- A low debt-to-income (DTI) ratio
- High income
- A large cash reserve
Down Payment Help
If you can handle the 500 credit score standard but can’t afford the down payment, down payment assistance may be available through a Housing and Urban Development (HUD) grant, or you can seek assistance from your local government (check your city and county for down payment aid programs).
Other Program Options
A standard FHA loan isn’t your only option for buying a mortgage online when you have bad credit. Other program options you may consider include:
- USDA rural development loans – This program was created to stimulate home ownership in rural areas. It turns out that “rural areas” is a very broad term, because people in 90 percent of the country are eligible for this program. However, be aware that credit requirements are slightly more demanding than for an FHA loan (but no down payment is required).
- VA loans – Veterans can apply for a no-down-payment, no-mortgage-insurance home loan through the Veterans Administration (VA). Like the USDA rural loan program, VA loans require a credit score that’s somewhat higher than the new low-end FHA score (620 or above). Check with the VA to find out if you’re eligible.
- Home improvement loans – If you’re interested in rehabbing a house that needs some work, an FHA 203k loan provides the funding to purchase the property along with the additional cash you need to make repairs. There’s a streamline 203k loan, which has a quicker loan approval process, and a standard loan for properties that require substantial structural repairs to the foundation, or plumbing or electrical systems. The 203k loan requires a FICO credit score of at least 640 to qualify. The Fannie Mae HomeStyle Renovation Mortgage is similar to a 203k loan, though money to purchase a home is combined with repair funds in one overall sum payment.
Bad Credit Mortgage Lenders
The loosening of the credit score requirement has encouraged a growing number of commercial lending institutions to offer manageable loan terms for people with poor scores. For example, Rocket Mortgage makes FHA, VA and USDA loans available to borrowers with lower scores (a score of at least 580 is generally required, with a down payment of just 3 percent). Vylla requires a credit score of just 500 with a 3 percent down payment. Most of these loans are FHA, VA or USDA, and the majority of borrowers who qualify have scores below 650. Other bad credit commercial lenders include JG Wentworth, Homebridge and Network Capital, each of which requires 3 percent down on a home loan.
It’s a lonely feeling not being able to buy a house you love because your credit standing is low. It’s a problem many Americans face — according to a recent FICO report, more than a quarter of all Americans have bad credit. Fortunately, policies aimed at reinvigorating the housing market have produced the availability of bad credit mortgage loans thanks to the decision to reduce FHA credit score requirements.