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First Time Home Buyers with Bad Credit

By Sari R. Updated on 10/29/2014

It used to be a lot easier to find lenders who would give home loans to first time home buyers with damaged creditIn the past, credit scores were essentially ignored when obtaining an FHA home loan.  Now, most lenders won’t even look at borrowers unless with a middle credit score of 640 or more.  Credit bureaus have also intensified the scoring models.  This simply means that credit scores are lower for some people who thought their credit was doing pretty well.

While mortgage experts recommend home buyers have a good credit score, it’s not an absolute requirement. If your credit score isn’t great, it may still be possible for you to become a home buyer - it just means that you will have to pay a higher interest rate.

As a first time home buyer with bad credit, you have two specific types of loans that you may qualify for: VA and FHA.

bad credit scoreFHA loans are a great option for bad credit home loans because they require only a 3.5% down payment and a minimum credit score of 640.  As a first time homebuyer, there are down payment assistance programs available to you to let you get into your new home with no money down.

The VA mortgage program is targeted toward first time homebuyers who are armed services veterans.  Currently, there are around 29 million veterans eligible for VA home financing.  Frequently, VA loans will let first time homebuyers with less-than-ideal credit purchase a home with no down payment and will give them low interest rates.  You are also eligible for this loan if you are in active duty, the reserves, or married to a veteran. 

What are First Time Home Buyer’s Programs and how can I qualify for them?

First time buyer’s programs are made to offer benefits such as low/no down payment, low interest rates, restricting lender fees and subsidizing interest.  The catch to these programs is that there is a cap on the home prices – which might limit choice of neighborhoods and areas. 

For example, Fannie Mae HomePath is a first time buyer’s program with a 30 year fixed mortgage with a 5% down payment and 660 minimum credit score.  This program has an income limit.  Other 1st time homeowner’s programs similar to this includes:

  • Fannie Flex 95 Financing Program
  • First Home Buyers Down Payment Assistance Program
  • USDA 100% Financing Program

How can I increase my chances of being approved for a bad credit home loan?

There are three main things that can help you get approved for a mortgage: 

  • Increasing the down payment
  • Showing a willingness to stay in the area
  • Buying a reasonable amount. 

Mortgage officers like when buyers can stay in their home for a few years.  If you show reason to stay in your home for several years (a job, family, community ties, etc.) then you’ll be more likely to be approved.

Another strategy for increasing your chances of being approved for a mortgage with bad credit is to increase your down payment.  Generally, getting enough money for a down payment is one of the biggest problems to buying a home.  If you’re struggling financially, there are several down-payment assistance programs that you can utilize.   Figuring out how to come up with the money for a down payment shows commitment and tenacity to loan officers – an impressive quality for 1st time homebuyers with bad credit. 

Overall, the best strategy for increasing your home loan approval chances is to be reasonable about the house and home loan you can afford.  It’s always better to start small so that the chances of losing the house to foreclosure and therefore gaining more bad credit are less.

Of course, all of these chances are all subject to who your lender is and the risk that he or she is willing to take.  Obviously, the higher your credit score is, the higher your chances are of obtaining a mortgage loan.

What compensating factors should I highlight in my loan application to offset my low FICO score?

Purchasing a home with bad credit is not an easy task, but it’s not impossible.  Your lender will decide whether or not giving you a home loan will be possible, but here are some compensating factors you might want to highlight in your application to make your chances stronger:

  1. Job Stability– If you’ve been working at the same job, or even the same industry for five or more years, be sure to mention it.  Also be sure to mention regular pay raises and bonuses – upward trends in income area always a good sign for loan officers and shows that you could handle an increase in utilities or property taxes.
  2. Self-discipline– If you can prove that bad credit is only from your past and that you now have stability in payment history, this will offset a low FICO score.  Some ways of doing this are contributing yearly to a retirement account or setting aside a set amount each month to a designated savings account.
  3. Proof– Be prepared to show your loan officer proof of regular income or contributions to retirement.  Letters from landlords saying rent was paid on time will not suffice to serve as enough proof in the case of a home loan.
  4. Increased Down Payment– If you have a down payment that is substantial and bigger than 20% of the loan, you’ll want to highlight this factor as it could be a positive aspect of your application.

Overall, lenders want to lend to people who have demonstrated responsibility and have medium to high credit scores.  If you are denied a loan application because of your bad credit, it would be to your benefit to try building it up over the next few months and years and applying again once it is a little more stable.

Below is a list of companies that can help you either secure a mortgage or  repair your credit.

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About The Author:
Sari R.
Sari R. is a mortgage editor for Lender411com. She graduated with a Bachelor's Degree in Screenwriting and Public Relations/Advertising from Chapman University. She can be reached at sarelyn@lender411com.

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