Over the past few months there has been a steady increase in the number of loan programs for borrowers with damaged credit. While there is not a flood of programs like there was last decade, there are a handful that can be a real benefit. Lenders have realized that there were many homeowners impacted by the short sale and foreclosure crisis. They are trying to walk the tightrope of generating new business while keeping acceptable lending standards. There is a give-and-take with loans for risky borrowers. They often require additional down payment or low debt to income, but they are available. Here are three loan options if your credit is poor:
FHA. The primary option for a borrower with damaged credit is an FHA loan. An FHA loan is simply a loan program backed by the Federal Housing Administration (FHA). The requirements for the credit score and down payment are lower than for a conventional mortgage. You can find a lender that will do an FHA loan with a credit score as low as 580. However, these loans require 20% down. If your credit score is 620 or higher you can get into the property for just 3.5% of the purchase price. The down payment funds can come in the form of a gift from an eligible family member or seller’s credit. The downside is that all loans require private mortgage insurance (PMI) regardless of down payment for the life of the loan. This will add to your monthly payment depending on the exact credit score and loan amount. The other issue is that there are many restrictions with the condition of the property. These items must be fixed by the seller prior to the appraisal, and many sellers do not want to have to deal with this.
Mortgage broker loan programs. Many of the problems with the mortgage collapse last decade were blamed on the mortgage industry. While they were at fault in some ways, they were just one of many perpetrators. Today there are still many reputable local mortgage companies still doing business. What makes these companies unique is that they do not work with just one set of lending standards and guidelines. They work with dozens of lenders and have access to dozens of programs. In recent months, there has been an increase in the number of minimum down payment options. Some lenders have gone as low as just 1% down payment, with excellent credit. This program is only available with a handful of mortgage brokers. Every few weeks new programs are hitting the market. If your credit is poor, working with a mortgage broker may give you access to the most programs.
State bond programs. State bond programs are programs aimed specifically for borrowers with poor credit. They are backed by the local Housing Finance Agency (HFA). They are similar to an FHA loan in that they are used for first-time home-buyers or borrowers who have not owned real estate within three years. Much like FHA, they offer reduced down payment and interest rates. The downside is that not all traditional lenders or mortgage brokers offer these programs. They can also take much longer than a traditional loan transaction, and there are also stat bond loan fees. You should be fully aware of the fees and guidelines before moving forward with this type of loan.
There may not be a ton of loan programs available for borrowers with damaged credit, but the number is constantly rising. If you are in this situation you should find out if there are ways to quickly improve your credit score by removing on old item or paying an account off. Talk to your bank and mortgage broker and find out what options are available. Poor credit doesn’t mean you can’t buy a house. It simply means there are more hurdles to jump. Regardless of your credit, find out what you are qualified for today!