Having bad credit does not necessarily mean you do not pay your debts. There are many reasons that lead to developing bad credit, like illness and a previous job loss. Many people assume that it means you cannot get approved for a home loan because that is the way that things have been for a long time. Due to economic instability, however, lenders are now making it possible to get a low credit score mortgage. The key to obtaining a good deal on your loan is knowledge.

There are many different kinds of home loans and programs available. With bad credit, your options are generally limited, but not completely horrible. If you qualify for a mortgage, you are on your way to owning a home and building a positive credit history.

Loan Type #1:

An FHA loan is one of the common low credit score mortgage available. It is guaranteed by the government though the Federal Housing Administration. These loans are so popular because even though the qualifying criteria is not the same as other kinds of mortgages, the loan terms do not differ much.

Understanding FHA Mortgages

Most people who have heard about FHA loans believe that the financing is provided by the government. In fact, this is not true. These loans are only guaranteed by the government. The financing for a home loan still comes from private lenders. It is like insurance – the government insures the loan so lenders can extend credit to high risk borrowers.

Qualifying for an FHA Loan

A typical mortgage loan is generally based on several factors, using your FICO credit score as the core and major factor. An FHA loan does not rely on your credit score. This type of low credit score mortgage gas other factors that will determine if you qualify.

Your credit history, as a whole, is the main factor here. The FHA looks at your whole history, but is more interested in the last year. If you have made payments on time during that year you are considered acceptable. It is not just limited to newer accounts either. If you are making payments on old, previously delinquent accounts this counts, and help even more. The volume of credit inquiries, and what type of business inquired, are considered. Some types of new inquiries are overlooked, like those that are mortgage related.

The FHA also looks at your housing history for at least a year. If you can show that you have made your rental payments on time, you will meet these qualifications for a low credit score mortgage. You can provide canceled checks or rent receipts along with a copy of your lease agreements or statement from the landlord.

Benefits and Drawbacks

Because there are different qualifying criteria, an FHA loan is particularly beneficial. The FHA does not consider delinquent collections if you have an acceptable reason why you did not pay. Down payments are smaller than other bad credit loans and if a family member gives you the amount for the down payment it does not count against you.

This type of low credit score mortgage can have its drawbacks. You will have a limited amount that you can borrow depending on your area and the housing market. You will need to have mortgage insurance with at least 1.5% up front.

Loan Type #2::

An 80/20 mortgage loan is another option for people with low credit scores. Quite simply it is a combination loan. It is designed for people who do not have a down payment. It combines 80% of the loan with 20% that would have been a down payment.

Understanding an 80/20 Loan

With this type of low credit score mortgage, two loans and two lenders are involved. The first loan is 80% of the total cost of the home. The remaining 20% is a separate loan through another lender as the down payment.

Qualifying for an 80/20 Loan

Qualification criteria for this type of mortgage loan is going to be similar to other loans. Your FICO score and credit history are big influences. Unless you use a mortgage broker, you will need to have two copies of every document so each lender has a copy.

Benefits and Drawbacks

The biggest benefit of an 80/20 low credit score mortgage is that you do not need to come up with a down payment. Another benefit is that you are not required to get private mortgage insurance, which saves you as much as $60 a month. The interest and payment amount is going to be much lower because the loan is split. Because there are two different loans with two different terms and one is larger than the other, you are going to pay off one loan before the other. When the smaller loan is paid, you will save the money that is spent each month on that loan.

An 80/20 loan has a few disadvantages. Since there are two loans, there are two mortgages, which means there are usually two different terms. One mortgage could have a fixed rate, while the second could have a balloon or adjustable rate. Additionally, you will need to maintain two separate payments and pay all the closing costs associated with both loans.

Improve Your Chances

Although there are options available for home loans, there are some things you can do to improve the chances that you will get approved. Start with your credit. In many cases, there are mistakes or inconsistencies in account reporting. Usually there are accounts on your credit that you have paid and closed that are still reporting as open but do not show payments. Lenders can mistake these for delinquent accounts and they also affect your FICO score.

You can also increase your chances with getting a low credit score mortgage if you can save between 5% and 10% for a down payment. This can also help you secure a lower interest rate and smaller mortgage payment. If you are not able to save money, get a co-signer good credit, like a family member. Having a credible co-signer shows the bank that there is someone that will be responsible for the loan if you should default.

Are you looking to get a bad credit score mortgage loan?  Many people with poor credit often wonder how it is possible to get a mortgage loan approved if they don’t have good credit.  The truth of the matter is that there are many different ways that you can get a home loan with bad credit if you are willing to put the effort into getting one.  There are many different things that you can do to help approve your attractiveness to potential lenders.

If you have a bad credit rating then the first thing you should do before thinking about applying for a home loan is to check your credit score. Go online and get a free copy of your credit report.  Your report will give you details on what particular issues are affecting your credit rating.  Examine the report to make sure there are no errors.  If you find anything that is not correct then you should contact the appropriate credit bureau about the error.

After you have found out about your credit rating, you should then work to pay down some of your existing debts.  Paying off you debts will have many benefits for you.  The first thing that will happen once some of your debts are reduced is that your credit score will improve.  Another effect that reducing your debts will have is improving your debt to income ratio.  The debt to income ratio is a ratio that many lenders use to consider the borrower’s ability to repay potential loans.

Once you have worked to reduce some of your outstanding debts, you can focus on saving your money.  Saving money for a down payment is very important in the eyes of potential lenders.  The larger the down payment that you can come up with, the better the chance lenders will approve your mortgage loan.  You should ensure that you try and save up at least 5-10% of the mortgage amount.  Especially if you have a poor credit rating, a large down payment will be necessary to get mortgage loan approval.

Another great step you can take to increase the chances of getting a home loan with bad credit is to find the right lenders.  Because the mortgage industry is such a competitive market, there are many lenders that are available.  You should look at different lenders and find one that offers competitive interest rates to bad credit borrowers.  This may take time, but it is definitely worth it to ensure that you get your home loan approved.

An important part of the American dream is to one day own your own home.  Although this dream is realized by millions of Americans, there are still millions who are struggling to achieve this goal.  One thing that often affects people from realizing this dream is a bad credit rating.  It is often very common for a bad credit history to affect someone’s current financial situation.  Getting bad credit mortgage loans are possible if you are willing to find the right lender who offers the loans.

The first thing you should do if you have a poor credit rating is see if you can apply for an FHA (Federal Housing Administration) loan.  The loans are good because they allow people who a poor credit rating to still get access to loan money from lenders.  What FHA loans do is they guarantee FHA loans to private lenders who issue the loans.  This means that the private lenders risk is reduce substantially.  An FHA loan is important in allowing bad credit home buyers to get access to loans that they wouldn’t otherwise be approved for.

Although FHA loans give you access to loans even if you have a bad credit rating, you still need to show lenders at least a year worth of good payment history.  This means that within that year period you shouldn’t have any defaults on your debt or show any late payments.  Bad credit mortgage loans are made easier with FHA assistance; however, they are still harder to get then traditional loans.

People who are thinking about applying for an FHA loan should know that lenders still require a down payment for the loan.  This means that you won’t be able to get the loan approved if you don’t have any money down.  Having a down payment of 5-10% can ensure that you get approval for your home loan.

Another important factor that many lenders consider before approving loans is the borrower’s debt to income ratio.  Your debt to income ratio is considered an indicator of your ability to repay your bad credit home loan.  Having a high ratio means that you have a lot of outstanding debt relative to your income level.  Paying down some of your debt will improve your ratio, which will look good in the eyes of different lenders.

The most important part about getting bad credit mortgage loans approved is finding the right lender.  Do a comprehensive search online and see the different lenders that offer loans for low credit score borrowers.  This will ensure that you get a competitive interest rate on your mortgage loan.