Low Credit Score Mortgage

Having bad credit does not necessarily mean you do not pay your debts. There are many reasons that lead to developing bad credit, like illness and a previous job loss. Many people assume that it means you cannot get approved for a home loan because that is the way that things have been for a long time. Due to economic instability, however, lenders are now making it possible to get a low credit score mortgage. The key to obtaining a good deal on your loan is knowledge.
There are many different kinds of home loans and programs available. With bad credit, your options are generally limited, but not completely horrible. If you qualify for a mortgage, you are on your way to owning a home and building a positive credit history.

Loan Type #1:

An FHA loan is one of the common low credit score mortgage available. It is guaranteed by the government though the Federal Housing Administration. These loans are so popular because even though the qualifying criteria is not the same as other kinds of mortgages, the loan terms do not differ much.

Understanding FHA Mortgages

Most people who have heard about FHA loans believe that the financing is provided by the government. In fact, this is not true. These loans are only guaranteed by the government. The financing for a home loan still comes from private lenders. It is like insurance the government insures the loan so lenders can extend credit to high risk borrowers.

Qualifying for an FHA Loan

A typical mortgage loan is generally based on several factors, using your FICO credit score as the core and major factor. An FHA loan does not rely on your credit score. This type of low credit score mortgage gas other factors that will determine if you qualify.

Your credit history, as a whole, is the main factor here. The FHA looks at your whole history, but is more interested in the last year. If you have made payments on time during that year you are considered acceptable. It is not just limited to newer accounts either. If you are making payments on old, previously delinquent accounts this counts, and help even more. The volume of credit inquiries, and what type of business inquired, are considered. Some types of new inquiries are overlooked, like those that are mortgage related.

The FHA also looks at your housing history for at least a year. If you can show that you have made your rental payments on time, you will meet these qualifications for a low credit score mortgage. You can provide canceled checks or rent receipts along with a copy of your lease agreements or statement from the landlord.

Benefits and Drawbacks

Because there are different qualifying criteria, an FHA loan is particularly beneficial. The FHA does not consider delinquent collections if you have an acceptable reason why you did not pay. Down payments are smaller than other bad credit loans and if a family member gives you the amount for the down payment it does not count against you.

This type of low credit score mortgage can have its drawbacks. You will have a limited amount that you can borrow depending on your area and the housing market. You will need to have mortgage insurance with at least 1.5% up front.

Loan Type #2::

An 80/20 mortgage loan is another option for people with low credit scores. Quite simply it is a combination loan. It is designed for people who do not have a down payment. It combines 80% of the loan with 20% that would have been a down payment.

Understanding an 80/20 Loan

With this type of low credit score mortgage, two loans and two lenders are involved. The first loan is 80% of the total cost of the home. The remaining 20% is a separate loan through another lender as the down payment.

Qualifying for an 80/20 Loan

Qualification criteria for this type of mortgage loan is going to be similar to other loans. Your FICO score and credit history are big influences. Unless you use a mortgage broker, you will need to have two copies of every document so each lender has a copy.

Benefits and Drawbacks

The biggest benefit of an 80/20 low credit score mortgage is that you do not need to come up with a down payment. Another benefit is that you are not required to get private mortgage insurance, which saves you as much as $60 a month. The interest and payment amount is going to be much lower because the loan is split. Because there are two different loans with two different terms and one is larger than the other, you are going to pay off one loan before the other. When the smaller loan is paid, you will save the money that is spent each month on that loan.

An 80/20 loan has a few disadvantages. Since there are two loans, there are two mortgages, which means there are usually two different terms. One mortgage could have a fixed rate, while the second could have a balloon or adjustable rate. Additionally, you will need to maintain two separate payments and pay all the closing costs associated with both loans.

Improve Your Chances

Although there are options available for home loans, there are some things you can do to improve the chances that you will get approved. Start with your credit. In many cases, there are mistakes or inconsistencies in account reporting. Usually there are accounts on your credit that you have paid and closed that are still reporting as open but do not show payments. Lenders can mistake these for delinquent accounts and they also affect your FICO score.

You can also increase your chances with getting a low credit score mortgage if you can save between 5% and 10% for a down payment. This can also help you secure a lower interest rate and smaller mortgage payment. If you are not able to save money, get a co-signer good credit, like a family member. Having a credible co-signer shows the bank that there is someone that will be responsible for the loan if you should default.

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