Mortgage Lenders for People with Bad Credit
Who are the Mortgage Lenders for People with Bad Credit?
Having less than perfect credit is not only inconvenient, it can become a huge roadblock to large purchases like a home. Since the damage from a few mistakes or an unfortunate accident can affect you for years, many people choose to try to find a lender that will work with their credit, rather than wait until they can buy more house with the same money using a more traditional mortgage loan.
The great news is that your bad credit may still be good enough. Many programs have reduced their minimum credit scores or allow manual underwriting when there’s an extenuating circumstance behind the credit hit.
More Forgiving Loan Programs
Although you still may get denied, there are a few traditional loan programs that can help you get a better loan with the credit you’ve got right now. Your file may require manual underwriting, however, and not all banks are willing to do this. Ask before you apply, and if they tell you they never do a manual underwrite, move on to the next guy. Here are three good places to start mortgage-hunting:
United States Department of Agriculture. If you live in a rural area, you may qualify for one of the USDA’s loan programs. The site says that they now require a credit score of 640 to streamline your application, but they do allow manual underwriting that can make the loan at the lender’s discretion. This is where you’d plead your case and demonstrate that your credit problems are due to some situation that has passed.
United States Department of Veterans Affairs. Veterans and currently serving members of the military can find a friendly harbor for their poor credit in the VA’s home loan program. The most important qualification for these loans is your service, not your credit or your income. They absolutely take your ability to pay into consideration, but are far more forgiving than you might imagine. Just be sure to allow plenty of time for approval, since the VA can move slowly.
Federal Housing Administration. FHA has long been the first mortgage lender for home buyers who are getting into the market. It is an easier organization to work with than Fannie Mae or Freddie Mac and providers are frequently more willing to manually underwrite loans for borrowers that are promising. The base score to qualify for an FHA loan is 500, but with a caveat. You’ll need a big down payment for that to work. 580 is the number if you’re looking to take advantage of FHA’s 3.5 percent downpayment option.
There’s one more asterisk on this: Lenders can add their own requirements on the loans they make. These extra rules, called lender overlays, could make it hard for you to qualify at one bank and easier at another. They’re still selling the same program, but working with two different sets of internal rules. For example, Bank A may not write an FHA loan on credit scores under 620 in any circumstance, where Bank B might be willing to write at 580, provided you have a solid work history and good recent payment history.
Your Last Option for a Mortgage with Bad Credit
Peddlers of non-qualified mortgages may be able to provide you with an exotic-type mortgage that will ignore your credit issues, or even hook you up with an investor who is looking for a good return on their investment via high interest rate mortgages. There’s a lot to dissect here, but the short version is that going this route is fraught with danger.
You’re no longer in a world of regulated lending, you’re in the Wild West. Anything goes, so you have to read every form, do every calculation, and take every precaution to protect yourself from shady practitioners. That’s not to say that there aren’t ethical NQ mortgage providers, just that there are definitely some that aren’t. And it only takes one to take your credit from bad to dumpster fire in no time.
When you meet with an NQ mortgage provider, ask a lot of questions. Ask about the mortgage features, and why they believe this mortgage is a better fit than another. Ask who’s financing the mortgage. The more you ask, the better of a feel you’ll get for the lender in front of you. If they try to move you through quickly and won’t answer the questions you ask, you’d be best to show yourself out.
Things to watch with an NQ mortgage include, but aren’t limited to:
Interest rates. If you’re dealing with an NQ mortgage, you’re almost always going to be paying considerably more in interest. Just make sure you understand how much interest you’re really paying, especially if you’re using multiple loans with a “blended” rate.
Prepayment penalty. Never ever get a mortgage with a prepayment penalty. This penalty will mean that you can’t pay your loan off before a set period, even if you sell the house, without a significant financial penalty. You can’t even make a bigger payment than the minimum or send in your tax return to eat down the principal a bit. Prepayment penalties aren’t good for the consumer under any circumstances.
Closing costs. Working with an NQ mortgage lender often means that you’ll have more options from more banks and investors than you would with the bank that handles your checking account, for example. But so many options also come with a lot more fees. The closing costs from this type of lender can be many times higher than from a traditional bank, make sure you know how much you’re going to need for closing from the get-go.
Exotic loan features. If your loan has a balloon, negative amortization or an interest-only period, don’t sign the paperwork unless you truly understand what this means and have a plan to get a better product ASAP. These features only set you up for disaster down the road.
No matter which type of mortgage you choose, always read the paperwork carefully and ask about anything you don’t understand. Mortgages are complicated, and you’re not expected to know everything. This is a loan you’ll be tied to for decades and one that can destroy your financial life if you end up defaulting.