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Mortgage

5 Home Loans for People With Bad Credit

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You don’t need a perfect credit score to get a mortgage — there are home loans for people with bad credit. But before getting this type of mortgage, find out how a lower credit score affects your overall borrowing costs.

Buying a home with bad credit

It’s possible to buy a home with bad credit — you could have a credit score as low as 500 and still qualify for a mortgage. The lower your credit score, though, the fewer lending options you’ll have and the higher your mortgage rate will be.

FICO scores, the credit scores used by most lenders, typically range from 300 to 850. Having a lower credit score translates to higher risk for a lender, and vice versa. Any score 669 or lower is considered “fair” or “poor.” Here’s a breakdown:

  • Exceptional: 800 and higher 
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 580 and lower 

Lenders like to see high credit scores because it exhibits an ability to manage debt, make on-time payments and use credit responsibly. Your creditworthiness will come into question if you plan on buying a home with bad credit, but it doesn’t have to hold you back from homeownership.

5 home loans for bad credit

Consider one of the following home loans for bad credit.

Fannie Mae HomeReady

Fannie Mae’s HomeReady mortgage program is an option for both first-time homebuyers and repeat buyers with limited access to down payment funds and a fair credit score. This conventional home loan has cancellable mortgage insurance for those who put down less than 20%, and gives borrowers the option to use boarder or rental income to help them qualify. If all borrowers on a loan are first-timers, at least one borrower is required to complete a homeownership education course.

Eligibility requirements include:

  • A minimum 620 credit score
  • A minimum 3% down payment
  • A low- to moderate income

FHA Loans

Mortgages backed by the Federal Housing Administration (FHA) could be considered bad credit home loans because they make it easier for low-credit-score homebuyers to get a mortgage. FHA loans have a low down payment requirement, but you’ll pay mortgage insurance premiums (both upfront and annual) for the life of your loan. If you put down at least 10%, you can get rid of mortgage insurance after 11 years.

Eligibility requirements include:

  • A minimum 10% down payment for a 500-579 credit score
  • A minimum 3.5% down for a 580+ credit score
  • Borrowing within your county’s FHA loan limits

USDA loans

The U.S. Department of Agriculture (USDA) insures mortgages funded by approved lenders through the USDA home loan program. There’s no minimum required credit score, but a 640 score could help you get approved automatically if you meet employment and income requirements.

Eligibility requirements include:

  • No minimum required down payment
  • Meeting local income limits
  • Buying a home in a designated rural area

VA Loans

The Department of Veterans Affairs (VA) also offers bad credit home loans through approved lenders for active-duty service members, veterans and eligible spouses. The VA doesn’t have a specific credit score requirement, but lenders may require a minimum 620 score. No down payment is required. Additionally, most borrowers will have to pay an upfront funding fee to offset the cost of VA loans to taxpayers.

Eligibility requirements include:

Non-qualified mortgage loans

The loans discussed above are all qualified mortgages, meaning they meet certain requirements that establish a borrower’s ability to repay a loan. There are also non-qualified mortgage (non-QM) loans, which have more wiggle room for high-risk borrowers, such as accepting credit scores below 500.

Eligibility requirements include:

  • Demonstrating your ability to repay the loan
  • A minimum down payment up to 20%
  • A maximum debt-to-income ratio of up to 55%

How to get a home loan with bad credit

Use the following list of tips as a resource to help you get a bad credit home loan.

  • Avoid applying for new credit. A new auto loan, credit card or personal loan application means you’ll have new inquiries on your credit reports, which can drop your credit score.
  • Dispute any credit report errors. Finding and disputing inaccurate information on your credit reports could improve your credit score and help lenders see you as a less risky borrower.
  • Pay your bills on time. Your payment history makes up the biggest chunk of your credit score at 35%, according to FICO. Making on-time payments can help boost your score and demonstrate your creditworthiness as a borrower.
  • Lower your outstanding debt load. Pay down your credit card and loan balances. Lenders don’t want to see that your income is stretched too thin to afford a mortgage. Keep your credit usage below 30% of your maximum credit limit across each of your accounts.
  • Don’t close any accounts. Closing old accounts, especially credit cards, shortens your overall credit history and can negatively impact your credit score.
  • Have your rent payments reported to the credit bureaus. As long as you’ve been maintaining an on-time rental payment history, having your rent payments reported to the bureaus may boost your score.
  • Make a larger down payment. A larger down payment can compensate for a lower credit score. Don’t completely drain your cash reserves, though. Keep three to six months’ worth of living expenses in a savings account for emergencies.
  • Pay for mortgage points. If you have the extra cash, consider buying mortgage points to lower your interest rate and overall loan costs. One point is equal 1% of your loan amount and can lower your rate by up to 0.25%.

Should you get a bad credit home loan?

Home loans for bad credit come with more risk for lenders, so you can expect to pay more as a borrower. Crunch the numbers with a mortgage calculator to help you determine whether to move forward with a bad credit mortgage or wait until your credit profile improves.

Here’s an example of how your credit score can affect your costs on a 30-year, fixed-rate mortgage:

 620 credit score760 credit score
Mortgage rate4.84%3.25%
Loan amount$200,000$200,000
Monthly payment
(Principal and interest)
$1,054.17$870.41
Total interest cost$179,501.82$113,348.55

As you can see, improving your score from “fair” to “very good” could amount to a mortgage payment that is nearly $184 less each month, saving you more than $2,200 each year and more than $66,000 in interest over the term of your mortgage.

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By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Life Events, Mortgage

What is Mortgage Amortization?

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The difference between your home’s value and how much you owe on your mortgage is your home equity. With each mortgage payment you make, mortgage amortization — or paying down the loan in installments — is at play, and each monthly payment brings you closer to owning your home outright.

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What is mortgage amortization?

Mortgage amortization is the process of paying off your loan balance in equal installments of principal and interest for a set time period. The interest you pay is tied to the balance of your loan (your principal) and the mortgage rate. When you first start making payments, most of the payment is applied to the interest rather than the principal.

Your principal payments catch up with interest over time until your loan is paid off. Once it reaches a zero balance, it becomes a “fully amortized loan.”

How mortgage amortization works

The easiest way to understand mortgage amortization is to look at how monthly mortgage payments are applied to the principal and interest on an amortization table. There are two calculations that occur every month.

  1. The first calculation measures how much interest is paid based on the rate you agreed to. The interest charge is recalculated each month as you pay down the balance, and you pay less interest over time.
  2. The second calculation reflects how much of the principal you pay. As the loan balance shrinks, more of your monthly payment is applied to your principal.

If you’re a math whiz, here’s the formula:

A mortgage amortization calculator does the heavy lifting for you. You can see the effects of amortization on a 30-year fixed loan amount of $200,000 at a rate of 4.375% below.

In the first year, you pay more than twice as much toward interest as you do toward the principal. However, the balance slowly drops with each additional payment. By the 15th year, principal payments outpace interest and equity starts building at a much faster pace.

How mortgage amortization can help with financial planning

A mortgage amortization table helps you assess the short- and long-term benefits of adjusting your mortgage payments. Making extra payments over the life of the loan or refinancing to a lower interest rate or term could save you thousands in interest charges over the life loan. Even better: you’ll end up with a mortgage free home sooner.

Using a mortgage calculator to configure a few scenarios, here are some financial goals you might be able to accomplish using mortgage amortization.

Calculate how much money you can save by refinancing

If mortgage rates have dropped since you bought your home, consider refinancing. If you’re in your forever home and don’t plan to move for a while, a half-percentage point drop in rates could make room in your budget to boost retirement savings, your emergency fund or put money toward other long-term financial goals.

The example below shows the monthly payment and lifetime interest savings if you replaced a 30-year, fixed-rate loan for $200,000 at 4% with a new loan with a 3.5% interest rate with the same terms.

While saving $56.74 per month on payments doesn’t seem like much, it adds up to $20,426.83 in interest savings over the loan’s lifetime.

See the effect of making extra payments

The amount of interest you pay every month is directly connected to your loan balance. Even a small amount added to the principal each month reduces interest over time. The graphic below shows how much you’d save adding an extra $50 every month to your payment on a $200,000, 30-year fixed loan with an interest rate of 4.375%.

Figure out when you can get rid of PMI

Borrowers who don’t make a 20% down payment on a conventional mortgage typically pay for private mortgage insurance (PMI). The coverage protects a lender against financial losses if you don’t repay the loan.

Once your loan-to-value ratio, or the loan balance in relation to the home’s value, reaches 78%, PMI automatically drops off. Multiply the price you paid for your home by 0.78 to determine where your loan balance would need to be for PMI to be canceled. Locate that balance on your loan payment schedule for a rough idea of the month and year PMI will end.

Decide if it’s time to refinance an adjustable-rate mortgage

Adjustable-rate mortgages (ARMs) are a helpful tool to save money on monthly mortgage payments. However, ARMs make more sense if you plan to refinance the loan or sell your home before the initial fixed-rate period ends and the loan resets to a variable interest rate.

An adjustable-rate mortgage amortization schedule helps you pinpoint when the loan will reset and gives you an idea of the worst-case scenario on payments. If the adjustments are outside of your comfort zone, consider refinancing your ARM into a fixed-rate mortgage.

The difference between a 15-year fixed and 30-year fixed payment schedule

Refinancing to a shorter term, such as a 15-year fixed mortgage, may save you hundreds of thousands of dollars over the life of a loan — but the trade-off is a higher monthly payment.

The graphs below show the difference between a 30-year amortization schedule for a $200,000, fixed-rate loan at 4.375% and a 15-year amortization schedule for the same loan amount at 3.875%.

The lifetime interest savings for a shorter loan payment schedule is $95,447.16. As long as the $468.31 increase in your mortgage payment doesn’t prevent you from meeting other savings or investment goals, the long-term savings are worth it.

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By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

Minimum Mortgage Requirements for Buying or Refinancing a Home in 2020

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If you plan to buy or refinance a home, having a basic grasp of minimum mortgage requirements will help you zero in on the best home loan for your needs. Knowing the lending guidelines for income, debt, credit scores and down payments puts you in a better position to shop around for a home loan.

Minimum mortgage requirements to buy a home

When you purchase a home, lenders review your entire financial picture to ensure you’re likely to repay the loan. Lenders consider the following items:

Down payment amount. A down payment — the upfront money required to buy a home — can come from your own savings, a gift or down payment assistance.

Credit score. Lenders pull your credit to review your scores and assess how you’ve managed credit accounts over time. Typically, the higher your credit score, the lower your interest rate and monthly payment will be.

Debt-to-income (DTI) ratio. Lenders divide your total debt, including your mortgage, by your gross monthly income to calculate your DTI ratio. The Consumer Financial Protection Bureau (CFPB) suggests a DTI ratio of no more than 43%.

Occupancy. Minimum mortgage requirements are the most lenient if you’re buying a home as a primary residence.

Here are the key mortgage requirements for the most popular loan programs:

Loan typeCredit scoreDown paymentDTI ratioOccupancy
Conventional6203%45% (or less), but can go up to 50% in some instancesPrimary
FHA500-579
580
10%
3.5%
43%*Primary
VANo minimum (620 recommended)0%41%*Primary
USDA6400%41%*Primary, in designated rural areas
*Borrowers with higher DTI ratios may be approved in some cases

Conventional loans. Fannie Mae and Freddie Mac have stricter conventional loan guidelines than government-backed mortgages. Here are some conventional programs worth considering:

  • Conventional 97% financing. With no income limits, qualified buyers can borrow up to the maximum conforming loan limit of $510,400 in 2020 (borrowers in high-cost areas have higher limits). However, you must be a first-time homebuyer to be eligible.
  • Fannie Mae HomeReady®. The HomeReady program requires a 3% down payment and isn’t just for first-time homebuyers. Income eligibility varies by location. Borrowers must complete a mandatory homebuyer education course.
  • Freddie Mac Home Possible®. A 3%-down program that provides extra flexibility for sweat-equity down payments and co-borrowers. Income limits also apply.
  • Conventional loans with private mortgage insurance (PMI). Conventional lenders require mortgage insurance to cover the risk of making loans with less than a 20% down payment. Also called private mortgage insurance (PMI), the premium is added to your monthly payment. The lower your credit score and down payment, the higher the monthly PMI cost.

FHA loans. The Federal Housing Administration (FHA) insures mortgages with lenient qualifying guidelines. First-time homebuyers with rocky credit and little saved for a down payment may get approved for a government home loan if they don’t qualify for a conventional mortgage. Features of FHA loans include:

  • Loan limits. FHA loan requirements include limits on how much you can borrow based on where you live.
  • Upfront and annual mortgage insurance. To offset the risk of lending to borrowers with lower credit scores, the FHA charges two types of mortgage insurance premiums: upfront and annual. The first is a lump-sum, upfront mortgage insurance premium (UFMIP) of 1.75%. An annual mortgage insurance premium (MIP) ranging from 0.45% to 1.05% of the loan amount is paid monthly as part of your mortgage payment. FHA mortgage insurance premiums are the same regardless of your credit score.

VA loans. Active-duty military service members, veterans and eligible spouses can benefit from home loans guaranteed by the U.S. Department of Veterans Affairs (VA). Even with no down payment, mortgage insurance is not required for VA loans. Instead, borrowers pay a funding fee to offset the costs of the VA loan program to taxpayers.

USDA loans. Low- to moderate-income families can purchase homes in designated rural areas with a loan guaranteed by the U.S. Department of Agriculture (USDA). You’ll pay upfront and annual guarantee fees, but no down payment is required. Use the USDA property eligibility tool to see if a home near you qualifies.

Minimum mortgage requirements for a refinance mortgage

Lenders use a different set of criteria to approve refinance mortgages versus a purchase loan. Factors considered for a refinance include:

Reason for a refinance. Getting a mortgage to reduce your current monthly payment usually comes with the easiest qualifying guidelines. Some government-backed refinance programs don’t require income paperwork or an appraisal. Tapping equity with a cash-out refinance (which replaces your current loan with a larger loan and lets you withdraw the difference in cash) comes with extra restrictions.

Loan-to-value ratio (LTV). Lenders consider how much money you’re borrowing compared to the home’s value. Refinance mortgage guidelines for LTV ratios are more flexible for rate-reduction refinances than other types of refinance transactions.

Here are the key mortgage requirements for the most popular refinance loan programs:

Loan typeMaximum LTV ratioPurpose of refinancingCredit scoreDTI
Conventional
rate-and-term refinance
97%Reduce rate and payment62045%*
Conventional cash-out refinance80%Withdraw cash from home equity62045%*
FHA streamline refinanceN/AReduce rate and paymentN/A
History of on-time payments
N/A
FHA cash-out refinance80%Withdraw cash from home equity50041%*
VA interest rate reduction refinance loan (IRRRL)N/AReduce rate and paymentN/A
Prove on-time payments
N/A
VA cash-out refinance90%Withdraw cash from home equityNo minimum
(620 recommended)
41%*
USDA refinanceN/AReduce rate and paymentN/A
History of on-time payments
N/A
*Borrowers with higher DTI ratios may be approved in some cases

Home loan requirements vary when it comes to the paperwork you’ll need and how closing costs can be financed. Refinance mortgage closing costs typically run 2% to 6%, depending on your loan amount.

Conventional rate-and-term refinance. This conventional refinance program allows you to reduce your rate and roll in closing costs for up to 80% of your home’s value. Plan on providing income documents again but, in some cases, an appraisal isn’t required.

Conventional cash-out refinance. Replacing your current loan with a larger one and pocketing the difference in cash entails the same process as when you bought your home. You may pay a higher rate if you have poor credit scores. A conventional cash-out refinance doesn’t require any mortgage insurance and is an ideal cash-out choice for borrowers with a credit score of 620 or higher.

FHA streamline refinance. As long as you’ve made at least seven payments on your current mortgage on time, you’re eligible for an FHA streamline refinance. No income verification or appraisal is required. One catch, though: You’ll pay a higher interest rate if you don’t want to pay closing costs out of pocket; they can’t be rolled into your loan amount without an appraisal.

FHA cash-out refinance. Although you can tap equity up to the same LTV as a conventional loan, FHA requires you to pay both MIP and UFMIP again. The FHA program is one of the more common cash-out refinance loans for bad credit.

VA IRRRL. A VA interest rate reduction refinance loan allows eligible borrowers with a current VA loan to refinance without proving income or getting an appraisal. An added bonus: you can roll closing costs into your loan amount.

VA cash-out refinance. Current VA borrowers can tap more equity than conventional or FHA loan programs allow. Full income and credit documentation, along with a VA appraisal, are reviewed for approval.

USDA streamlined-assist refinance. Homeowners with a current USDA loan paid on time in the past 12 months are eligible. No appraisal or income verification are required. Closing costs (including the guarantee fee) can be rolled into the loan amount.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.