Best Mortgage Lenders For Low Credit Scores In 2021: Learn About Your Options
Having a low credit score can hold you back in many ways, but it shouldn't prevent you from buying a home. The secret is looking for mortgage lenders who specialize in serving people with bad credit.
In this guide, we'll provide an overview of these home loan providers. We'll also provide some tips on how to get the best deal.
What's Considered "Bad Credit"?
According to the credit monitoring bureau Experian, here are the classifications for each FICO score range:
Excellent: 800 -850
Very good: 740-799
Very poor: 300-579
If you have a bad credit score, you might find it hard to get your loan approved by banks and traditional lending institutions. Even if you do get approved, the lender might demand a larger down payment, charge a higher interest rate, or require additional fees.
How Are Credit Scores Calculated?
Credit scores are computed by the three main credit bureaus: Experian, Equifax, and TransUnion.
These scores are computed based on the following factors:
Payment history: Late payments or nonpayment affect your credit score in a big way. Always make sure to pay your bills on or before their due date.
Credit utilization: This refers to the amount of credit you're currently using compared to the total credit limit.
Age of credit history: This will be based on how many years you've held your oldest credit account.
Credit mix/types of credit: This refers to the type of credit you have, like revolving credit or personal loans.
Amount of new credit: If you borrowed money within the past 6 months, this is considered new credit. Having recently opened credit will impact your score negatively.
Loan Types For Bad Credit
In general, there are two loan types for a borrower with lower credit. The first is conventional loans and the second is government-backed loans.
The US government is not a mortgage lender, but it can guarantee some loan types. These loans require a low down payment and have less stringent debt-to-income ratio requirements.
Here are some of the loan types you can choose from:
Federal Housing Administration (FHA) Loans: An FHA loan is ideal if you have a low credit score from 500-620. There is a minimum credit score requirement of 500 (with 10% down) or 580 (with 3.5% down).
VA Loans: This is a government-backed loan that’s available to eligible veterans and servicemembers. With a VA loan, you can apply with scores as low as 580-620, depending on the lender.
U.S. Department Of Agriculture (USDA) Loans: This is ideal for people who want to buy a home in a rural area. To qualify for USDA loans, you need a minimum credit score of 640.
Conventional loans are best for borrowers with moderate to good credit. Here are some of your options:
Freddie Mac Home Possible: This is the best mortgage for first-time homeowners with low to moderate credit. You need a credit score of 620.
Fannie Mae HomeReady: This is also ideal for low- to moderate-income buyers. You need a credit score of 620.
Non-Qualified (Non-QM) Mortgages: If you don't qualify for a conventional loan, you can look for a non-qualified mortgage. This is for people with credit scores that range from 500-580.
8 Best Mortgage Lenders For Borrowers With Low Scores
Shopping around is the key to getting a home loan despite having a bad credit score. Here are some of our top picks for low-down payment, low-score lenders:
Rocket Mortgage offers loans for a home purchase or refinancing. The website's rates are determined by Quicken Loans, the lender. Both of these organizations are owned by Rock Holdings, their parent company.
If you prefer to do the home loan application process online, Rocket Mortgage is the way to go. Just go to their website, answer a few questions, and get an email with the loan amount you can qualify for.
During underwriting, you can use the online system to sign the paperwork, monitor the progress of your application, and schedule the loan closing. Once you're approved for a loan, you can request a preapproval letter and lock in your interest rates.
Keep in mind that if you want mortgage rates that are customized to your situation, Rocket Mortgage might need to make a hard credit inquiry. This may lower your credit score by a few points.
Like Rocket Mortgage, Quicken Loans gives you the ability to complete your home loan application online. The company provides a wide variety of fixed-rate and adjustable loan terms, starting from eight to 30 years.
Additionally, Quicken Loans offers mortgage refinancing and loans for pricey homes. It's also the largest lender backed by the Federal Housing Administration.
The downside about getting loans for bad credit from Quicken Loans is that their rates and fees tend to be expensive. So, if you are looking for the cheapest loan options, you might need to continue shopping around.
Carrington Mortgage Services offers a variety of credit mortgage options for borrowers with lower credit scores than average. Even if you find it very difficult to qualify for a conventional loan, you might still have a chance to buy a house with this lender.
The company offers conventional and government loan options. You can even get low and no-down payment deals. Additionally, they offer refinance options.
Carrington also offers a range of options for first-time homebuyers. These are ideal for you if you have good credit but you don't have enough saved up for a down payment.
The downside of getting a low-credit mortgage with Carrington Mortgage Services is that rates tend to be higher compared to other lenders.
Network Capital Funding provides a wide variety of loan options, including purchase, refinance, and jumbo mortgages of up to $5 million. It also offers FHA loans, VA loans, and USDA-backed mortgages.
Like other lenders, you can use its web-based application to start the process and get updates. However, keep in mind that the Network Capital website doesn't offer customized mortgage rates. Additionally, home loan services are not available in all states.
Homebridge is ideal for borrowers with bad credit. It's also good for homebuyers who want the help of a loan officer. You can communicate with the loan officer in person or by phone – they'll help you understand the type of loan available to you and what you need to do to get approved.
Like most of its competitors, Homebridge offers a complete array of mortgage products, like government-backed loans. They also offer loans for purchase, refinancing, and renovation.
Mr. Cooper is another bad credit mortgage provider that provides both conventional loans and government-backed loans. Although you need to work with a loan officer to start the application, you can complete the process online.
The lender combines nontraditional credit data with manual underwriting to help you qualify for an FHA loan. This is best if you're a first-time homebuyer with no credit history.
Keep in mind that the lender will call or email if you want personalized mortgage rates. Current customers may also be eligible for a discount.
BNC National Bank is a federally chartered bank from North Dakota. They offer conventional loans with fixed and adjustable rates, as well as government home loan programs. VA loans make up a large chunk of its loan volume.
While the bank has improved online capabilities, you still need to reach out to a loan officer to get interest rates. You need a score of at least 640 to qualify, but the lender can also look at alternative credit data to determine if they should approve your application.
New American Funding is one of the few family-owned national mortgage lenders. It offers loans for purchase, refinancing, and more. You can also choose from fixed-rate and adjustable-rate loan terms.
If you prefer to start and complete the home loan application process online, you're in luck. New American has an updated online platform where you can submit your application, get quotes, and upload documents.
Keep in mind that the lender typically uses manual underwriting to check if you qualify for a mortgage, which means it may take longer than average to process your application. Mortgage rates may also be higher than median rates.
How To Get The Best Bad Credit Loan
Getting a mortgage is no easy feat, especially if you have a lower credit score than average. Here are some steps you can take to make sure you get the best deal on your mortgage.
Look For First-Time Buyer Programs
FHA, VA, USDA, and other government organizations offer new homebuyer programs. Before taking out a mortgage, check what programs are available and what you're eligible for.
Even if you've owned a property before, you might still qualify for first-time buyer programs, especially if you haven't owned a property in the past three years.
Look At A Variety Of Lenders
Traditional banks aren't the only ones offering mortgage loans. If you don't meet their credit score requirements, you can check other types of lenders. These include non-bank lenders, credit unions, community banks, and more.
Make A Larger Down Payment
Even if you have a less-than-perfect credit score, some lenders might give you a pass if you make a large down payment. You can also check if you qualify for down payment assistance programs nationwide.
Generally, it's good to save up a down payment of at least 10%. Lenders will find you less risky if you have more money to spare before taking out the mortgage.
Work With A Mortgage Broker
You don't have to complete the entire process alone. Try working with mortgage brokers to find a lender that caters to your circumstances. Keep in mind that lenders pay these brokers, so their services are free of cost to you.
Tips On Improving Your Credit
Home loans are easier to acquire if you have a good FICO score. Thankfully, there are some simple steps you can take to raise your credit score up by a few points before you begin your home loan application.
Pay Your Loan Balances
Credit utilization – a major factor in your credit score – refers to your credit card balance compared to your credit limit. For example, if you have a credit limit of $15,000 and you have a balance of $10,500, then you have a utilization of 70%.
Ideally, you should pay down your outstanding loan balance and limit credit utilization to 30% or less. This should help you improve your credit score.
Check Your Credit Report
Before you start applying for a home, you should first check your credit report. Sometimes, your poor credit is just a result of inaccurate or outdated information.
You can request a copy of your report from the three major credit bureaus: Experian, Equifax, and Transunion. The government also has a platform where you can check your credit account for free.
Avoid Hard Credit Inquiries
Hard credit inquiries happen when a lender tries to access your full credit report. Getting too many inquiries sends a bad signal that shows you're desperate for more credit. It also lowers your score.
To avoid hard credit inquiries, ask the lender if they're making a "hard pull" or "soft pull" on your credit report. The latter should not affect your credit score.
Increase Your Available Credit
Increasing available credit is one of the easiest ways to improve your credit score fast. You can do this by making a credit limit request. Most credit card companies allow you to request as many increases as you like without making a hard credit inquiry.
Ask Your Lender To Request A Rapid Rescore
A Rapid Rescore can update your score quicker. This is ideal if you've already taken steps to improve your credit score. The lender can request it on your behalf, but you can't do it on your own.
Frequently Asked Questions On Bad Credit Home Loans
Getting a bad credit mortgage loan isn't easy, but it's not impossible. To help you learn more about the process, we've compiled answers to some of the most frequently asked questions on the topic.
What other factors affect my application?
Aside from your FICO score, there are several factors that help lenders consider if they should approve your loan. These qualifications are the following:
Available cash for the down payment
Amount of outstanding debt
Income and assets
Length of work history
Debts in collections
What information is not considered when calculating credit scores?
Credit bureaus do not consider the following when computing your credit score:
Your race, color, or religion
Soft credit inquiries
Will my poor credit make my interest rate higher?
Yes. If you have a lower credit score than average, you need to make higher monthly payments due to higher interest rates. The good news is, you can always refinance your mortgage once you have a better credit history.
Do lower credit scores make mortgage insurance more expensive?
Yes, having a bad credit score can drive up the cost of private mortgage insurance on a conventional loan. The plus side is that your credit score will not affect mortgage insurance rates for FHA loans.
Can I get a co-signer to help me get a housing loan?
A cosigner with good credit history can help you get conventional loans much faster. Keep in mind that the loan may affect the cosigner's ability to borrow money if they wish to buy a home for themselves.
How do lenders afford to offer loans for bad credit?
Mortgage loans are secured loans, which means that the lender can seize your home and sell it if you stop making monthly payments. This allows lenders to offer lower rates compared to unsecured loans like personal loans and student loans.
Are there special homebuyer programs that can help me?
Yes. Even with bad credit, you can make homeownership a reality. Try looking at the following for assistance:
Habitat For Humanity: In some areas, this organization allows you to qualify for a loan even if you have a score under 600. You need to fall into a specific income range, take financial education classes, and volunteer with the program later on.
Neighborhood Assistance Corporation of America: This nonprofit organization works with lenders to help you get a mortgage with no down payment, no closing costs, and below-market rates. You also don't need to meet any credit score requirements.
Having a less-than-ideal credit score can make it a little difficult for you to qualify for a loan from banks and other traditional lending institutions. Thankfully, there are several lenders that offer loan options for borrowers with low credit.
If you need help securing a mortgage, get in touch with Wesley Mortgage, LLC. We'll help you get a mortgage even if you have a complicated credit history.