When buying a new home, there’s no doubt your credit score will play a major role in not only qualifying for a mortgage, but also what kind of mortgage rate will be attached to your home loan. Contrary to popular belief, though, it’s still possible to buy a home, even if your credit score isn’t up to par. Whether your poor credit is due to poorly managed debt, filing bankruptcy, or even a previous foreclosure, certain mortgage programs are specifically available for home buyers with bad credit.
Different types of home loans for bad credit
If you’re hoping to buy a Nashville home with bad credit, three bad credit loans come to mind that may be the right fit: FHA Loans, VA Loans, and Subprime Mortgage Loans.
FHA home loans, short for Federal Housing Administration insured loan, originally dates back to the 1930s and was designed to help stimulate the housing market. As one of the oldest federal government home loan programs, FHA mortgages are for borrowers with fair or poor credit, borrowers who have already filed for bankruptcy, or borrowers who need a low down payment. Many experts say FHA loans are the easiest mortgages to qualify for and it’s easy to transfer to a new home buyer should you need to sell down the road. Since FHA loans differ from a convention mortgage, though, these loans require two kinds of mortgage insurance premiums and the property must also meet various conditional standards in order to satisfy FHA appraisal requirements.
Here’s a closer look at FHA loan requirements and how you can qualify as a home buyer:
- FICO® score at least 580 = 3.5% down payment
- FICO® score between 500 and 579 = 10% down payment
- Debt-to-Income Ratio less than 43%.
- The home must be the borrower's primary residence
- Borrower must have steady income and / or proof of employment
- MIP (Mortgage Insurance Premium ) is required
The VA home loan program was developed to assist first time home buyers who are veterans of the armed services. In many instances, VA loans allow veterans to buy a home with bad credit and/or with no money down, helping make it the most affordable way to purchase a new home. If you’re currently serving in the armed forces, are currently in the reserves, or even if you're married to someone who is, you can quality for a VA home loan, even if your credit is bad or don’t have the money for a down payment.
Subprime Mortgage Loans
A subprime mortgage loan is specifically for first time buyers with bad credit. Available to anyone with a low credit score, even below 600, subprime mortgages do carry a higher risk for mortgage lenders and banks, which usually results in a higher interest rate. But despite costing borrowers more, a subprime mortgage loan is a great way for home buyers with bad credit to purchase home now when few other options are available.
Buying a Home with Bad Credit: Our Final Thought
If you’re wanting to buy a Nashville home with bad credit and you already know a poor credit score is limiting your options, start planning NOW! Work to improve your credit score gradually by paying down debt and paying all your bills on time. In addition, keep your monthly expenditures steady and start saving each and every month, even if it’s just a little at the beginning. Over time, it all adds up!
First Time Home Buyer Resources
Are you a first time home buyer in Nashville or the surrounding Middle Tennessee area? Check out our directory of resources and information below for answers to all your home buying questions.