Can I Get a Mortgage With Bad Credit?

Well the short answer is yes – you can get a mortgage even with a bad credit score. Though not as plentiful as they used to be, there are still bad credit mortgage lenders out there. The slightly longer answer is – are you even sure you want to own a home with bad credit?

Owning a home is a huge milestone and a big deal for almost anyone. It is definitely a sign of accomplishment and there is a certain level of dignity that comes with being a home owner. Those with decent amount saved up for the down payment and a good credit score range, should definitely consider home ownership. However, those of us with less than perfect credit, taking out a mortgage might not be the best move.

Are home loans for people with bad credit a good idea?

If you currently have bad credit you should consider waiting before you start looking at homes. There are a couple of reasons of why it might be a smarter move to wait until you have been able to patch up your credit score, before you start looking at a new home.

The first reason is the down payment. The majority of mortgage lenders are going to want a down payment towards the house to help show you are serious about buying. The down payment is usually 10-15%, but some lenders may require up to 20% down. If the average home price is $425,000, you will need to put a down payment of up to $63,750! I think it is safe to assume that if you have bad credit, you don’t have that kind of money to put towards a down payment.

The second reason is your monthly mortgage payment. If you are going to be a homeowner your biggest bill ever month will be your mortgage payment. It is suggested that to live comfortably your house cost should be approx 1/3 of your monthly income. If you make ~$4,000 a month, you shouldn’t spend more than $1,300 a month on your mortgage. The different between what you pay monthly with good credit vs. bad credit, is the difference between staying afloat or falling behind.

If you take the home price above, with a 15% down payment and great credit, you can expect an interest rate of about 3.625% – making your monthly mortgage payment around $1,743. That means to live comfortable you would need to earn ~$5,000 a month salary. Now if you take the same home, same down payment but you have bad credit, you can expect an interest rate of about 5.250% – making your monthly mortgage payment around $2,325. That means you would be need to making $7,000 a month to live comfortably. You also end up paying an extra $180,000 for your home because of bad credit.

They best thing would be to put some of that money towards fixing up your credit score and paying off and debts to increase your credit rating.

If you have recently started looking into owning your own home, you have most likely opened yourself up to a world of new terminology. Some if you kind of understand, the rest you really have no idea what it means. You can use this page as a quick cheat sheet for common mortgage terms

Loan Terms

Interest Rate – The the finance charge being applied to your loan. Not the best way to compare loans, better to look at the APR.

APR – Annual percentage rate is what you actually end up paying for your mortgage. This takes the interest rate and adds in other fees and charges over the course of the loan.

Points – Points are a form of pre-paid intrest on a mortgage. Each point is 1% of the total loan

Principle – The amount actually being borrowed, or the amount still owed on the mortgage – excluding interest and other charges. Paying down the principle ahead of time can make your monthly payments cheaper

Mortgage Types

ARM – Adjustable rate mortgages are mortgages where the interest rate can change during the course of the loan. These are usually represented by numbers, such as 5/1 ARM. The first number is how long you are keeping your original interest rate, the second number is how often (in years) the interest rate can be adjusted.

Fixed Rate – These mortgages have a fixed interest rate the entirety of the loan. With the most common being 30 year and 15 year fixed rates.

FHA Loan – Federal house authority loans are insured by the government through private insurance. They usually require low down payments and don’t look at FICO scores, making them somewhat ideal for first time buyers or those with poor credit.

Equity Mortgage Loan – If you home is worth more than you currently owe, you might qualify to get a loan for that money. An equity mortgage loan leverages the value of the home allowing you to get cash for the equity of your house.

Before you start shopping around for a new home, you will want to get a few things in order before you end up making a costly mistake. These steps can end up saving you thousands of dollars, and you may even realize that buying a home will need to wait as now is not the right time.

1. Figure out your budget – Planning out your budget is the most important thing you should do – before you even think about owning a home. The mistake most people make when they buy their first home is they try to make their budget fit around their home, causing financial stress and late payments. If you can not afford your monthly payments comfortably, it is only a matter of time before you foreclose on your new home. You need to make your home fit withing your budget. Look at what your paying right now for rent, are living comfortable or just barely staying afloat. A good starting point is taking your combined monthly income and multiplying it by 0.333 -  this will give you a starting point for your mortgage budget.
2. Clean up your credit score – Get a copy of your credit report and look for easy fixes. If you can raise your credit score even 15-20 points, this could save you a few points of interest, which could be close to $100,000 on a 30 year loan. There are three easy fixes for your credit report – small debts that went to collection agency, and improving your debt to credit ratio and getting caught up on any revolving credit accounts.
3. Look at your down payment – You will want to take a honest look at what you are putting in for a down payment on your home. If you are only able to put down around 10%, not only will you have trouble getting a mortgage with bad credit, but you may want to seriously evaluate if you should be buying a home right now. It might be better to put some of the money toward fixing your credit score, which will save you money in the long run. Also the better your credit score the lower the down payment most lenders require.

Taking the time to go through that quick checklist will help you evaluate if now is the right time to start looking at buying a home. If you are asking yourself “Can I get a mortgage with bad credit?” – the answer is yes, but it will cost you.