4 tips for finding the best bad credit mortgage lenders
How to find a home loan when you have bad credit
You don’t have to feel judged for imperfect credit. Here are four tips that will give you the knowledge you need to talk to mortgage lenders with confidence and choose the one that’s best for you, even if your credit score isn’t that high.
1. Know your credit score and the score you need
You could believe you have bad credit because of some late or missed payments. But before you assume that your credit score is in the basement, you need to find out what it really is, for several reasons:
Your credit score might be higher than you think
Knowing your score will help you understand the loan programs you are likely to qualify for.
You can get your credit score for free by create your NerdWallet account. Your credit score dashboard not only shows you your score, but also describes how you are doing based on six factors that affect it, including the amount of available credit you are using, payment history, and average age of accounts.
740 and more: You are entitled to the lowest interest rates and fees.
700-739: You qualify for most mortgage programs, with relatively low rates and fees.
620-699: You may be eligible for some conventional loan programs as well as loans from the Federal Housing Administration or the United States Department of Veterans Affairs.
580-619: Your best bet might be the FHA in this credit score bracket. With a credit score of 580 and above, you can qualify for an FHA loan with a down payment of 3.5%. You might also be eligible for a VA loan, with the right mix of income and expenses. Find it best VA lenders.
500-579: You might qualify for an FHA loan if you have a 10% down payment. Not all FHA lenders will approve mortgages with a credit score in this range, so you may need to shop around. Try the guide for best FHA lenders or a local mortgage broker.
When talking to a loan officer in person or on the phone, mention your credit score early. This way, you will know immediately if the lender can help you or if continuing the conversation would be a waste of time.
If your credit score could be improved, you can start by checking your credit report for inaccurate information. Mistakes are not uncommon.
There are three main credit bureaus and you are entitled to request a free credit report each year or when you are denied credit, insurance or employment due to poor or limited credit.
2. Know how much you can afford – and borrow
If you don’t have great credit and are looking to buy a home, use a home accessibility calculator establish a baseline budget to understand how a home loan will affect your monthly finances.
When shopping for lenders, one of the first steps they will take is to assess how much you are eligible to borrow, based on your income and expenses. This amount may be more than what you think you can afford, so it’s very important to understand what you can afford before looking for loans and getting pre-approved.
From lender to lender, your estimates of what you can borrow shouldn’t vary much. If one estimate is significantly lower or higher than the others, ask why. The answer could help you narrow down your search for the right lender.
3. Look for lenders who offer FHA or VA loans
The FHA is well known for allowing down payments as low as 3.5% for most qualified borrowers. But it’s friendly to homebuyers for another reason: to be more forgiving of low credit scores.
Many conventional mortgage programs will not approve home loans for applicants with a credit score of less than 620. But FHA loans may be an option with credit scores below 620 and up to 500. Lenders have different credit score requirements on mortgages, including FHA loans, so it’s a good idea to shop around .
The VA does not have a minimum credit score requirement, but most lenders do. If your credit score is below 620, you may need to look for a lender who will offer you a VA loan with such a low score.
4. Come to the table with a larger deposit
With a low credit score, you’ll want to look for what some lenders call “compensating factors” that partially offset the hits to your credit. One of the most effective offsetting factors is a large down payment. Lenders know that you will work hard to avoid foreclosure if you have made more than the minimum down payment. This means that you are less risky to lend.
Conventional lenders tend to charge less for credit-distressed borrowers who make down payments greater than 10%.
Another compensating factor is a low debt to income ratio. If your home payment is 28% or less of your before-tax income, that’s a note in your favor when you apply for a mortgage.
Bring up your compensating factors early in the conversation with a loan officer, preferably immediately after discussing your credit score. When your credit score is low, finding the right lender involves highlighting your strengths as well as your weaknesses, and understanding which lenders are willing to work with you.