In this blog, we will cover and discuss the various mortgage options home buyers with bad credit have in qualifying and getting approved on a mortgage loan. We get countless daily calls from home buyers with bad credit asking for advice on the types of mortgage options they have in getting approved for a mortgage. Can home buyers with bad credit qualify for home loans?  The answer to the question of can home buyers with bad credit qualify for home loans, the answer is it depends. Home buyers with bad credit can qualify for home loans as long as they have been timely with their payments in the past 12 months.

Can Home Buyers With Bad Credit Qualify For a Mortgage?

Having prior bad credit is fine due to extenuating circumstances. Outstanding collections and charge-off accounts do not have to be paid to qualify for owner-occupant government or conventional loans. However, to get an approve/eligible per automated underwriting system (AUS), borrowers normally need a timely payment history reporting on their credit reports for the past 12 months. One or two late payments are not deal killers.

Homebuyers with bad credit often need help in securing a mortgage. However, several strategies and loan programs can help make homeownership possible.

Many borrowers can get an approve/eligible per AUS with one or two late payments in the past 12 months. In this blog, we will discuss how home buyers with bad credit can qualify for mortgages. We will concentrate on FHA loans. FHA loans is the most popular loan program for home buyers with bad credit.  In the following paragraphs, we will cover some options and considerations for homebuyers with bad credit. Home Buyers With Bad Credit Mortgage Options During and After Chapter 13 Bankruptcy

Loan Options For Home Buyers With Bad Credit

FHA loans are insured by the Federal Housing Administration and designed to help low-to-moderate-income borrowers. They allow for lower credit scores and smaller down payments. A minimum credit score of 580 is required for a 3.5% down payment. Borrowers with scores between 500 and 579 may still qualify but must make a 10% down payment. Lower credit score requirements, lower down payment, and more flexible underwriting standards.

VA Loans For Home Buyers With Bad Credit

VA loans is available to veterans, active-duty service members, and some National Guard and Reserves members. The VA does not set a minimum credit score requirement for VA loans, but most lenders prefer a score of at least 620. No down payment is required, private mortgage insurance (PMI) is not required, and credit requirements are more lenient.

USDA Loans For Home Buyers with Bad Credit

USDA loans is for rural homebuyers with low-to-moderate income. While there is no fixed minimum credit score requirement, a score of 640 or higher is preferred for streamlined processing. No down payment is required, and mortgage insurance premiums are lower.

Non-QM Loans For Hme Buyers With Bad Credit

Non-QM loans or Non-qualified mortgages are designed for borrowers who do not meet the strict criteria of conventional loans. Non-QM loans ore flexible with credit scores, sometimes approving scores as low as 580. Alternative income verification methods, flexible DTI ratios, and higher loan amounts.

Improving Your Chances

Improve Your Credit Score. Pay Down Debt: Reducing your credit card balances and paying off outstanding debts can improve your credit utilization ratio. Correct Errors: Check your credit report for errors and dispute any inaccuracies with the credit bureaus. Make Timely Payments: Ensure all your bills and loan payments are timely. A larger down payment can improve your chances of approval and may result in better loan terms.

Provide Non-Traditional Credit References

Alternative Credit: If you lack traditional credit, you can demonstrate your creditworthiness by using rental payment history, utility bills, and other regular payments. A mortgage broker can help identify lenders willing to work with your credit profile and guide you through the application process. By exploring these options and improving your financial profile, you can increase your chances of securing a mortgage and achieving homeownership even with bad credit.

Best Loan Program For Home Buyers With Bad Credit

Let’s cover the various mortgage programs for home buyers with bad credit. There are government loans, conforming loans, and non-QM loans. The three government loan programs are FHA, VA, and USDA. Government loans are originated and funded by private lenders but are insured by a government agency. The government agency will partially insure and guarantee the loss to lenders if the lender follows their guidelines.

Conventional Loans Guidelines For Home Buyers With Bad Credit 

Fannie Mae and Freddie Mac set conventional loan guidelines. Therefore, conventional loans are called conforming loans because they need to conform to Fannie Mae or Freddie Mac Guidelines. Conventional loans are not government loans. However, lenders make sure they conform to Fannie Mae or Freddie Mac Mortgage Guidelines. The reason for this is Fannie Mae and Freddie Mac will not purchase conventional loans on the secondary market if it does not meet their standards. All government and conventional loans allow home buyers with bad credit. However, the best loan program for home buyers with bad credit is FHA loans. FHA loans have the most lenient mortgage guidelines for home buyers with bad credit.

Home Buyers With Bad Credit Mortgage Options

Eligibility Requirements For FHA Loans

It is much easier to get an approve/eligible per automated underwriting system on FHA loans than in any other loan program. Many home buyers with bad credit who may qualify for VA Loans often go with FHA loans versus VA loans because they cannot get an approve/eligible per AUS on VA but can on FHA loans. Here are the basic FHA Eligibility Requirements. The minimum credit score to qualify for a 3.5% down payment FHA loan is 580 FICO.

FHA and VA Loans With 500 Credit Scores

Borrowers with credit scores under 580 down to 500 FICO can qualify for FHA mortgages with a 10% down payment. There is a 2-year waiting period after the Chapter 7 Bankruptcy discharge date. There is a 3-year waiting period after foreclosure, deed in lieu of foreclosure, and short sale.

Home Buyers With Bad Credit Mortgage Options For Borrowers with 500 Credit Scores

FHA and VA Loans During and After Chapter 13 Bankruptcy 

Borrowers in a current Chapter 13 Bankruptcy repayment plan can qualify for FHA loans one year into the plan with Trustee approval and manual underwriting. There is no waiting period after a Chapter 13 Bankruptcy discharge date. Any borrowers who do not have a two-year seasoning period after a Chapter 13 Bankruptcy discharged date needs to be manually underwritten. Gustan Cho Associates is one of the very few mortgage brokers nationwide that can do manual underwriting on FHA and VA loans. Outstanding collections and charge-off accounts do not have to be paid off to qualify for FHA loans.

Qualifying For Mortgage With Recent Late Payments

There are instances where home buyers with bad credit and recent late payments can qualify for home loans. NON-QM loans have no mandatory waiting period requirements after bankruptcy or foreclosure. Borrowers who cannot get an approve/eligible per automated underwriting system (AUS) on government or conventional loans can qualify for non-QM loans. Let’s take a case study. Let’s say a homeowner recently sold their home and needs to purchase another home after the sale.

Getting Approved For a Mortgage with a Mortgage Late Payment in the Past 12 Months

If the homeowner had recent late payments on their mortgage in the past 12 months, they cannot qualify for a government or conventional loan until the late mortgage payments have been seasoned for at least 12 months. This holds true even though the mortgage loan balance has been paid off. This is a situation where they can utilize our non-QM loan program and purchase a home after the sale of their existing home. After six months to one year, they can then qualify for a traditional government or conventional loan. For more information on qualifying for a mortgage with bad credit, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are mortgage brokers and correspondent lenders with no overlays on government and conventional loans. We are experts in non-QM, bank statements, and alternative mortgage loan programs.

Home Buyers With Bad Credit Mortgage Options on Non-QM Loans

FAQs: Home Buyers With Bad Credit Mortgage Options

• 1. Can Home Buyers with Bad Credit Qualify for a Mortgage? Yes, home buyers with bad credit can qualify for a mortgage. Still, it depends on various factors, including their recent payment history. Generally, lenders look for timely payments in the past 12 months.
• 2. What are the Key Mortgage Options Available for Home Buyers with Bad Credit? Several key mortgage options are available for home buyers with bad credit. FHA loans are popular for low credit scores, VA loans are for veterans and active-duty service members, USDA loans are for rural homebuyers, and non-QM loans are flexible for those not meeting conventional criteria.
• 3. How Can Home Buyers Improve Their Chances of Getting Approved? Prospective buyers should focus on boosting their credit score to enhance the likelihood of home loan approval. This can be achieved by lowering credit card balances and settling outstanding debts. It’s also crucial to dispute any inaccuracies found on credit reports to ensure they reflect an accurate credit history. Making all bill and loan payments promptly further aids in presenting responsible financial behavior. Additionally, providing evidence of non-traditional credit references, such as consistent rental payment history or utility bill payments, can demonstrate creditworthiness.
• 4. What is the Best Loan Program for Home Buyers with Bad Credit? FHA loans are often considered the best option due to their lenient requirements and flexibility for low-credit-score borrowers.
• 5. Can Borrowers with Recent Late Payments Qualify for a Mortgage? Yes, borrowers with one or two late payments in the past 12 months can still qualify, particularly for FHA loans. However, they might need help with government or conventional loans and need to consider non-QM loans.
• 6. Are Outstanding Collections and Charge-Off Accounts a Deal Breaker? No, outstanding collections and charge-offs do not need to be paid to qualify for FHA and other government loans. However, having a recent, timely payment history is important.
• 7. Can Borrowers in Bankruptcy Qualify for a Mortgage? Yes, but the qualifications depend on the type of bankruptcy filed. After a Chapter 7 Bankruptcy, there’s a required 2-year waiting period following the discharge before qualification is possible. For Chapter 13 bankruptcy, borrowers can qualify for one year into the repayment plan, provided they have trustee approval and go through manual underwriting. There’s no waiting period after the discharge for Chapter 13, but manual underwriting is still necessary if it’s within two years.
• 8. What Should Borrowers with Recent Mortgage Late Payments Do? If recent late payments have occurred, borrowers might only qualify for government or conventional loans once the late payments have been seasoned for at least 12 months. Non-QM loans can be a viable option during this period.
• 9. How Can I Get More Information or Assistance? For more details or personalized advice, contact Gustan Cho Associates at 800-900-8569, text for a faster response, or email gcho@gustancho.com. They are experts in non-QM, bank statements, and alternative mortgage loan programs.

By exploring these options and enhancing their financial situation, individuals with low credit scores looking to buy a house can improve their likelihood of obtaining a mortgage and becoming homeowners.