Here’s how to get a mortgage with bad credit

Business News | 4 Mar |

Just because you have bad credit doesn’t mean you can’t buy the home of your dreams. Here’s how to get a mortgage with bad credit in Arizona.

Every year, millions of Americans have their mortgage loan applications rejected. If you’re part of this group, do you know why your application was rejected?

It was likely rejected because your credit score was too low. This is the case for 26 percent of mortgage applications that get denied by lenders.

It’s easy to feel downtrodden when your application has been rejected. The good news, though, is that there are several different steps you can take to increase your chances of getting approved in the future. 

Even if you have a bad credit score, you can still qualify for a mortgage.

Read on to learn everything you need to know about how to get a mortgage with bad credit in Arizona.

Minimum Credit Requirements

Lenders are pretty strict when it comes to credit requirements to qualify for a mortgage loan. They had to tighten things up quite a bit following the 2008 crash.

In most cases, if your credit score falls below the mid 600s, you may have trouble getting approved for a home loan.

Some lenders will approve you for a loan with a credit score lower than this, but you will have to pay a higher down payment in exchange.

For example, if you are a first-time homebuyer, you may qualify for a loan backed by the Federal Housing Administration if your credit score is 580 or above and you can pay a 3.5 percent downpayment.

If your score is between 500 and 580, you may still qualify, but you’ll have to pay a larger down payment — 10 percent.

How to Get a Mortgage with Bad Credit

If you have a subpar credit score, there are a few things you can do that will increase your chances of getting approved for a mortgage. Start by following these guidelines:

• Know Your Credit Score

The first step you ought to take, if you don’t already know it, is to figure out your credit score.

Request a free copy of your credit report from the Federal Trade Commission to get a detailed idea of where you stand and what is bringing your credit score down.

Are there errors on your credit report? Do you have old debts that are dragging you down? 

If you notice errors on your credit report, reach out to the credit bureaus and try to get them fixed. This can help to raise your score and increase your chances of getting approved in the future. 

• Find a Bad Credit Mortgage Lender

If you know that your credit is not where it ought to be, start looking for a mortgage lender that specializes in helping those with bad credit.

These lenders are sometimes known as subprime lenders. If you can’t get approved when working with a subprime lender, you might also want to consider a private lender.

Use caution when looking for subprime or private lenders. There are a lot of shady individuals out there who prey on people with subpar credit looking to become homeowners.

Avoid anyone who offers too-good-to-be-true results or promises that they can help you get approved. Nobody can make those kinds of promises. 

• Consider FHA and VA Loans

There are a few different government-backed loans out there designed to help first-time homebuyers who have low credit scores.

FHA loans are a good option for first-time homebuyers as they require a lower minimum credit score and a lower down payment.

VA loans, which are backed by the Department of Veterans Affairs, are also a good option for individuals who have served in the armed forces.

There is no minimum credit score required for VA loans, nor is a down payment required. These loans have higher approval rates, too.

• Save Up for a Large Down Payment

Often, you can offset a poor credit score if you are able to pay more money upfront for your home.

Generally speaking, lenders require homebuyers to put down five percent of the price of the home as a down payment (3.5 percent for those with an FHA loan). 

If you have a low credit score, you may have to put down a larger down payment (anywhere from 10-20 percent).

Work on saving up extra money for this larger downpayment if you think it will take too long for you to raise your credit score.

This isn’t always easy to do, of course, but it’ll be worth it in the end, especially if it helps you get into a home faster. 

• Plan for Extra Fees

When you’re applying for a mortgage and you have subpar credit, you should expect to pay additional fees if you do get approved. Some lenders will charge extra processing fees for a bad credit application. 

Remember that bad credit loans, be they for a home, a car, or anything else, tend to have higher interest rates associated with them.

You may have to accept a higher interest rate to get into a home. This isn’t the end of the world, though. You can refinance your home later to try and bring the interest rate down. 

• Work on Improving Your Credit

Finally, if you can’t get approved for a mortgage, make sure you’re taking steps to improve your credit score.

Make all your payments on time, pay down your debt as much as you can, and try to keep your credit utilization (the ratio of available credit to charges made each month) as low as possible. 

If you keep these up for a while, your credit score will improve and you’ll be more likely to get approved later on.

Looking for More Tips for Homebuyers?

Now that you know how to get a mortgage with bad credit in Arizona, it’s time to start applying.

As you can see, there are lots of strategies you can implement to get into the home of your dreams even if your credit score is less than stellar.

Just keep these strategies in mind and it’ll be much easier for you to get the loan you need.

Check out the real estate section of our website today for more advice on buying a home, whether it’s your first or your fifth.

You’ll find tons of great information here on mortgages, refinancing, and how to find the home you’ve always wanted.

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