Bad Credit Home Loans

Whether you're buying a house or refinancing an existing one, it can be challenging if you have bad credit. Mortgages are the toughest loan to qualify for in the US given the amount of money being borrowed coupled with the long tenure of mortgage (generally 30 years).

However, there are home loans geared towards borrowers with bad credit and here at United Fidelity Funding, we may have options for you.

In this article we’ll define what is bad credit, review some tips to improve your credit and review the home loans for borrowers with bad credit.

For more general information on steps to buying a house or on FHA Cash Out Refinances, visit those articles when you’re done here.

Definition of Bad Credit

Before reviewing which loan options are available for borrowers with bad credit, let’s first define what we’re talking about.

Below is a breakdown of the various credit score ranges. Borrowers with bad credit have a few select home loan options, but any borrower with 500 credit scores (500-599, and even borrowers up to 619) will find themselves with the same options.

Tips to Improve Bad Credit

Before applying for a mortgage, it’s never a bad idea to try and improve your credit.

Credit scores are calculated by FICO and while their algorithm is unknown, most credit experts agree that the following is what factors most into your scores:

• Payment History – 35%
• Revolving Debt Utilization – 30%
• Length of Credit History – 15%
• Credit Mix and New Credit – 10%/ea

Given that 65% of your credit score is based on payment history and credit utilization, improving your score involves (1) making on-time payments consistently for a long period of time and (2) reducing your credit utilization.

It’s not uncommon to see borrowers have poor or bad credit simply due to credit card utilization. If you’ve made on-time payments consistently, or haven’t had any late payments in 1-2 years, then credit card utilization is likely driving down your scores.

Focus on getting your credit card balances to 30% or less of the credit limit. The quicker you reduce the credit card balance, and carry low balances, the quicker you’ll see your credit scores increase.

Home Loans for Bad Credit & 500 Credit Score Home Loans

The credit score required for a mortgage varies based on which new home loan option you’re considering, but there are a few that are ideal for borrowers with bad credit and 500 credit scores.

FHA Home Loans

The FHA Mortgage is the ideal loan option if you have bad, poor and sometimes even average credit.

Here are a few benefits of bad credit FHA home loans:

• Minimum FICO down to 520 – while FHA does allow bad credit, it’s important to note that the higher your score, the more likely you are to get approved. Too many recent late payments however can be a big issue, so it’ll likely be important that you only have a couple of late payments within the last 12 months
• Low Down Payment – in order to get an automated approval for FHA, borrowers with under 580 credit will need at least 10% down. However, if your credit is above 580 you’re likely to still only need the traditional 3.5% down.
• Low Payments – the bad credit FHA loan is still very affordable despite lower credit scores. FHA rates can still be in the 4’s or low 5%-range even with bad credit. The other benefit to FHA loans is that their mortgage insurance is based on the loan amount, meaning you don’t pay higher mortgage insurance premiums even if you have bad credit.

You can apply for an FHA Loan online in a matter of moments to see if you qualify, or for more information read up on FHA property requirements and FHA Manufactured Home guidelines.

VA Home Loan

The VA Loan is an exclusive benefit for former and active US Military. If you served in our armed forces and are eligible, then the VA home loan is great for borrowers with bad credit as well.

VA loans technically have no minimum credit score requirement, however higher scores do make it more likely to qualify. Most lenders require a minimum FICO of 580 but there are options if you have bad credit in the low 500’s.

How to Get a Mortgage with Bad Credit

While FHA and VA home loans have options for borrowers with bad credit, it’s not a guarantee that your loan will get approved.

In order to get a mortgage with bad credit, there are a few things you should know in advance:

• Late Payments - Multiple recent late payments within the last 12 months may be an issue. So, if you’re able to wait, do all you can to avoid having any late payments within at least the last 12 months.
• Insufficient Funds & Bank Overdrafts – when an underwriter reviews a home loan, they’re looking at the various levels of risk and having bank statements that show you’ve had recent overdrafts (or even overdrafts in the last year) can be an issue.
• Down Payment, Assets, and Reserves – if your credit score is below 580 then a 10% down payment will be likely. If your score is above 580 then you may be able to qualify for 3.5% down. Down payments can come from a gift from a family member, but ideally, this money will come from funds you’ve saved either in checking or savings, or in a retirement account such as a 401(k).
• Disputes on your credit report – FHA loans have guidelines around active disputes on credit. If you have items currently disputed, then you may be eligible for a manual underwrite which has much more strict requirements than a traditional FHA loan approved through an automated underwriting system (AUS). In order to have a loan approved through AUS, you cannot have any disputes on any charge-off, collection or late payment from the last 24 months.

For more information on determining if you’re ready to buy a house, check out that article for further guidance.

Applying for a Home Loan with Bad Credit

Here at United Fidelity Funding, we’re one of the few lenders that offer FHA and VA loan options to borrowers with bad credit (above or below 580).

Our company has been in business for over a decade, and we help thousands of borrowers each year.

When you’re ready to see if you qualify, simply give our team a call, fill out the short form on the right side of this page, or you can apply online and one of our experienced loan officers will get in touch with you shortly.

If you’re unsure what to expect when getting pre-approved or talking to a lender about your options, you can read more about getting pre-approved for a home loan.