Mortgage Rates on Bad Credit Loans With Low Credit Scores

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Securing a mortgage with bad credit or a low credit score may be difficult, but it is still achievable. While traditional lenders may hesitate to approve borrowers with credit issues, specialized loan programs are designed for those with less-than-perfect credit. However, the mortgage interest rate plays a crucial role in determining affordability. In this article, we will talk about mortgage rates on bad credit loans for borrowers with bad credit, what loan options are available, and strategies to secure the best possible rate.

What Determines Mortgage Rates on Bad Credit Loans?

Here are what determines mortgage rates on Conventional loans:

• Credit Scores
• Debt-To-Income Ratio
• Manual versus automated underwriting system
• Type of property
• Occupancy: Owner Occupant, Second Homes, Investment Homes
• Loan-to-Value
• Loan Size
• City, County, or State

Having prior bad credit such as collections, late payments, bankruptcy, foreclosure, and deed-in-lieu of foreclosure, a short sale does not impact mortgage interest rates.

Government Loans

Government Loans are mortgages insured by a government agency. Here are the three government loans:

1. FHA Loans insured by the Federal Housing Administration or FHA
2. VA Loans, which is insured by the Department of Veteran Affairs
3. USDA Loans, which are insured by the Department of Agriculture Rural Development

Affects in Mortgage Rates on Bad Credit Loans

Lenders assess credit scores to determine the risk of lending to a borrower. A lower credit score suggest a higher risk for the lender, which leads to higher interest rates, stricter loan terms, and limited loan options. Lenders compensate for the increased risk by charging higher mortgage rates. Some lenders may require a larger down payment, additional reserves, or stricter income verification. And lastly, borrowers with bad credit may not qualify for conventional loans and may need to explore government-backed or non-QM loans.

Does Prior Bankruptcy Affect Mortgage Rates On Bad Credit Loans?

Prior bankruptcies and foreclosures do not affect mortgage rates on government and conventional loans. Borrowers who filed Chapter 7 bankruptcy have a mandatory 2-year waiting period before qualifying for an FHA-insured mortgage loan. This 2-year waiting period clock starts ticking from the date of the discharge of the Chapter 13 bankruptcy and not the filing date. For borrowers who have a foreclosure, there is a 3-year waiting period from the date of the sheriff’s sale or the date the deed foreclosed home is transferred out of their name. The date the deed is transferred from the homeowner’s name is crucial. Most lenders take their time in transferring a homeowner’s name out of the deed and transferring it into theirs.

Credit Score Ranges and Mortgage Rates on Bad Credit Loans

Credit Score Range	Loan Qualification	Typical Mortgage Rates
740+	Best loan terms, lowest interest rates	6% – 7% (as of 2024)
680 – 739	Good loan terms, competitive rates	7% – 8%
620 – 679	Higher rates, stricter requirements	8% – 9%
580 – 619	Subprime rates, limited options	9% – 11%
Below 580	Hard money/non-QM loans required	10% – 15%+

Note: Rates are for illustrative purposes and vary by lender, market conditions, and loan type.

Mortgage Rates on Bad Credit Loans Depend on Lenders

Mortgage rates are not necessarily higher for bad credit borrowers than those with good credit. FHA-insured mortgage rates on bad credit loans depend mainly on borrowers’ credit scores. Late payments, collections, judgments, charge-offs, tax liens, or high debt-to-income ratios do not impact mortgage interest rates on FHA Loans. Borrowers with 580 FICO or higher credit scores can qualify for 3.5% down payment FHA loans. A borrower with a 580 credit score will have higher mortgage rates than a 700 credit score borrower.

Loan Options for Bad Credit Borrowers

Despite having a low credit score, several mortgage programs are designed to accommodate borrowers with poor credit.

1. FHA Loans (Government-Backed)
   Minimum Credit Score: 500 (with 10% down) or 580 (with 3.5% down)
   Typical Interest Rates: Slightly higher than conventional loans but lower than subprime options
   Benefits: Low down payment, flexible credit requirements, and competitive rates
   Considerations: Mortgage Insurance Premium (MIP) is required for the life of the loan
2. VA Loans (For Eligible Veterans)
   Minimum Credit Score: No set minimum (lenders may require 580+)
   Typical Interest Rates: Lower than conventional loans, even with bad credit
   Benefits: No down payment, no private mortgage insurance (PMI), flexible credit guidelines
   Considerations: Must meet military service eligibility requirements
3. USDA Loans (For Rural Homebuyers)
   Minimum Credit Score: Typically 640, but some lenders allow lower scores
   Typical Interest Rates: Comparable to FHA/VA loans
   Benefits: No down payment required, low mortgage insurance
   Considerations: Property must be in a USDA-eligible rural area
4. Non-QM Loans (Alternative Loan Programs)
   Minimum Credit Score: Varies (500+ may qualify)
   Typical Interest Rates: Higher than government-backed loans (9% – 15%)
   Benefits: Bank statement loans, asset-based lending, and DSCR loans are available
   Considerations: Higher down payment (often 20%+), more flexible documentation
5. Hard Money Loans (Short-Term Solution)
   Minimum Credit Score: No strict requirement
   Typical Interest Rates: 10% – 15%+ (or higher)
   Benefits: Fast approval, asset-based lending (based on home equity)
   Considerations: High interest rates and fees; best for temporary financing

Mortgage Rates on Bad Credit Loans Are Higher

Borrowers with credit scores below 580 FICO will have higher mortgage rates. Mortgage rates on bad credit loans with lower credit scores are higher because lenders associate lower credit scores with higher risk. Mortgage rate-sensitive borrowers should optimize their credit scores before applying for a mortgage.

Should You Refinance Later?

If you purchase a home with a high mortgage rate due to bad credit, you can improve your score and refinance to a lower rate later.

When to Consider Refinancing?

Refinancing may be a smart option if your credit score has significantly improved (typically by 100+ points), mortgage rates have decreased, or you have built at least 20% home equity, allowing you to eliminate PMI on conventional loans.

Mortgage Rates on Conventional Loans

The higher the credit score, the lower the interest rate on conventional mortgage loans. Those who have just filed for bankruptcy two years ago or had a foreclosure three years ago can qualify for FHA loans. Gustan Cho Associates offers non-QM loans. NON-QM Loans do not have any waiting period requirements after bankruptcy or foreclosure. Most conventional loan programs have a long waiting period. 4-year waiting period after Chapter 7 Bankruptcy, recorded date of deed in lieu, and short sale to qualify for Conventional loans. 7-year waiting period after the recorded foreclosure date to qualify for conventional loans.

How to Get Lower Mortgage Rates on Bad Credit Loans?

Even with a low credit score, there are ways to increase your chances of obtaining a better interest rate.

• Improve Your Credit Score Before Applying
  Dispute inaccuracies on your credit report that may be hurting your score. Pay on time to build a positive payment history. Avoiding new credit inquiries before applying for a mortgage can also work in your favor.
• Save for a Larger Down Payment
  A higher down payment (10% – 20%) reduces lender risk and may qualify you for better terms. Government-backed loans like FHA allow as little as 3.5% down, but putting more down can reduce mortgage insurance costs.
• Consider a Co-Signer or Joint Applicant
  A co-signer with good credit can help ensure a lower rate. Adding a spouse or family member with a higher credit score may improve your approval odds.
• Shop Around for Lenders
  You can compare rates from multiple lenders, including mortgage brokers, credit unions, and non-QM lenders. Some lenders specialize in bad credit mortgage programs and may offer better terms.
• Work With a Mortgage Broker
  Mortgage brokers can access various loan programs and connect you with a lender that aligns with your credit profile. They may also negotiate better terms than you’d get along.
• Consider a Temporary Buydown
  Some lenders offer 2-1 or 3-2-1 buydowns, allowing you to start with a lower interest rate that gradually increases. This can be helpful if you plan to refinance once your credit improves.

Frequently Asked Questions: Mortgage Rates on Bad Credit Loans With Low Credit Scores

1. Can I get a mortgage with a low credit score?

Yes, loan options exist for borrowers with low credit scores, including FHA, VA, USDA, and non-QM loans. However, you may face higher interest rates and stricter lending requirements.

2. How does my credit score affect my mortgage rates on bad credit loans?

A lower credit score signals higher risk to lenders, resulting in higher interest rates. Improving your score can help you secure better terms.

3. What is the minimum credit score needed for a mortgage?

It depends on the loan type. FHA loans allow scores as low as 500 (with a higher down payment), while conventional loans typically require a minimum of 620.

4. Are there ways to lower my mortgage rates on bad credit loans?

Yes, you can improve your chances by increasing your down payment, improving your credit score, shopping around for lenders, or considering a co-signer.

5. Can I refinance later if I get a high-interest loan due to bad credit?

If your credit score improves, mortgage rates on bad credit loans drop, or you build at least 20% home equity, refinancing could help you secure a lower rate.

6. What loan options are best for bad credit borrowers?

FHA loans are the most common for low credit scores, while VA and USDA loans offer great terms for eligible borrowers. Non-QM and hard money loans are alternatives for those not qualifying for traditional financing.

7. Will a bigger down payment help if I have bad credit?

A larger down payment reduces lender risk and can help you qualify for a better interest rate.

8. How much higher are mortgage rates on bad credit loans?

Mortgage rates on bad credit loans can be 1%–5% higher than prime mortgage rates, depending on your credit score, loan type, and lender.

9. Can I qualify for a recent bankruptcy or foreclosure mortgage?

Yes, but waiting periods apply. FHA loans allow approval one year after a Chapter 13 bankruptcy (with court approval) and two years after a Chapter 7 discharge.

10. Should I work with a mortgage broker if I have bad credit?

Yes, a mortgage broker can help you find lenders specializing in bad credit loans and match you with the best available rates and terms. A broker can also explain in detail what is mortgage rates on bad credit loans.

Homebuyers or homeowners who have questions on mortgage rates on bad credit loans, please get in touch with us at 800-900-8569 or text us for a faster response Or email us at gcho@gustancho.com.