This guide covers mortgage rates on bad credit score loans. Are mortgage rates on bad credit loans higher? Having bad credit does not affect mortgage interest rates. Credit scores do. This is especially true on Conventional Loans. Conventional loans do affect mortgage interest rates more so than government loans. In this article, we will discuss and cover the impact bad credit and lower credit scores have on mortgage rates.
What Determines Mortgage Rates
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:
- FHA Loans insured by the Federal Housing Administration or FHA
- VA Loans, which is insured by the Department of Veteran Affairs
- USDA Loans, which are insured by the Department of Agriculture Rural Development
What Determines Mortgage Rates On Government Loans
Here is what determines mortgage rates on government loans:
- Credit Scores
- Type of property
- Loan size
- Manual Underwriting
- Down Payment does not affect rates due to the government guarantee
There are no loan-level pricing adjustments on the down payment for government 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.
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.
Mortgage Rates on Lower Credit Scores 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.
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. 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.
