Owning your own home is still the American dream. While having bad credit does not mean you will not be able to obtain a mortgage to finance the purchase of a home, it does limit your options. You may find that traditional lenders will not be willing to finance your loan.
Before giving up the dream of owning your own home, do some research. You may be surprised to find that, albeit for a higher price, there are many lenders willing to finance your mortgage. If you are able to secure a mortgage, this will give you some time to get your finances in order and refinance your mortgage at a lower interest rate in the future. In many areas of the country, homes are selling for a fraction of their original asking price due to the current slowdown in the economy. It is now a buyer’s market, and you should take advantage of the low-home prices while they last.
One of the first places you should check is with the FHA, especially if you are a first-time homebuyer. It is possible for a first-time homebuyer to secure a mortgage for as little as a 3.5% down payment. FHA interest rates have historically been some of the lowest in the financing industry. The credit requirements for the FHA are not as stringent as those of traditional finance companies.
How to Get a FHA Home Loan
The FHA can assist home buyers by helping them obtain a home loan through an FHA-approved lender. The FHA will not give you any money themselves but will promise the lender that they will pay the loan if you default on it. There are three main types of FHA loans available for home buyers. They include:
- A loan for first-time home buyers
- A loan for mobile home buyers
- A loan for those who are buying a home that needs fixing up. The loan includes financing to pay for repairs.
So, what are the steps to getting an FHA loan? First, you need to choose which of the above three loans would be best for you. For example, while you may not be a first-time home buyer, you may still qualify for the other two. If you know that you do not want a mobile home, then a fixer-upper would be your only choice. You will then need to go through the requirement list of the loan(s) you are interested in to determine if you qualify to receive it. Each of these loans will have its own qualification requirements, so it is important that you pay close attention to these before you go through the trouble of applying for the loan. There is an option to meet with a HUD-approved counselor before you apply if you have questions or need guidance.
Before or after you apply for a FHA loan, you need to find a lender that is FHA-approved. If you look for a lender before applying for the FHA loan, be sure to make sure they are a lender that is approved by the FHA and that they know you will be applying for an FHA loan. This is important since you are more likely to be given a loan if they know that you are working with the FHA. During this phase, you will apply through the lender just as you would, even if you were not working with the FHA. This includes having your credit report and income evaluated.
Once you are approved by both a lender and the FHA, it is time to find your new home. Since buying a home is a long-term commitment, make sure you plan for the future while home shopping. For example, if you plan to have four or more children, you should look for a home with a minimum of 3 bedrooms, even if there are only the two of you now. When you find your home, negotiate a fair and reasonable price and close the deal!
Before giving up the dream of owning your own home, do some research. You may be surprised to find that, albeit for a higher price, there are many lenders willing to finance your mortgage.
For people with low credit scores, the FHA may be your best option. If your credit score is very low, below 500, the FHA will not finance your mortgage.
There are a number of online lenders who will finance these mortgages, but you must be very careful and do your homework. Always check the company’s record with the Better Business Bureau, particularly looking at any complaints filed against the lender. With subprime lenders, you will be paying a higher interest rate, charged more points, and required to make a larger down payment. Be sure to check out all of the fees included in closing costs, as these can add up quickly.
Perhaps the best option in securing a mortgage with bad credit is to start putting away a nest egg, saving up for a down payment, and looking into improving your credit score. Start paying your bills on time, improve your credit score, and then reapply for that home mortgage loan.