First Time Home Buyers with Bad Credit

By Sari R. Updated on 7/19/2017

Before, it was easier to find lenders who would give home loans to first-time home buyers with damaged credit.  Credit scores were ignored when applying for an FHA home loan in the past.

Nowadays, however, most lenders won’t even consider a borrower unless their middle credit score is 640 or more.  

Credit bureaus have also raised the scoring models which could result in your credit score lower than previously thought. 

But there's still good news if you have less than perfect credit and are in the market to purchase a property!

Even with a low credit score, it may still be possible to get approval for a home loan - it just means that you will have to pay a higher interest rate.

 There are two types of loans that are well suited for first-time homebuyers with bad credit: VA and FHA.

FHA loans are an ideal option for bad credit home loans because they require only a 3.5% down payment and a minimum credit score of 640.  There are down payment assistance programs available to first-time homebuyers that help you get into your dream home with no money down.

The VA mortgage program is perfect for first-time homebuyers who are veterans. VA loans will let first-time homebuyers with a low credit score purchase a home without requiring a down payment and will also offer low-interest rates.  

You are also eligible for this loan if you are on active duty, the reserves, or married to a veteran. 

What are First-Time Homebuyer’s Programs and how can I qualify for them?

First-time buyer’s programs offer benefits such as low/no down payment, low-interest rates, restricting lender fees and subsidizing interest.  However, these programs often have a cap on the home prices – which might limit your choice of neighborhoods and areas. 

For example, Fannie Mae HomePath is a first-time buyer’s program with a 30 year fixed mortgage with a 5% down payment and 660 minimum credit score.  This program also has an income limit.  Other 1st-time homeowner’s programs similar to this are:

• Fannie Flex 95 Financing Program
• First Home Buyers Down Payment Assistance Program
• USDA 100% Financing Program

How can I increase my chances of being approved for a bad credit home loan?

Three main things that can help you get approved for a mortgage are: 

• Increasing the down payment
• Showing a willingness to stay in the area
• Buying a reasonable amount. 

Loan officers have a preference for buyers that plan on staying long term.  If you show reason to stay in your home for several years (a job, family, community ties, etc.), then you’ll be more likely to be approved.

Another strategy for increasing your chances of being approved for a mortgage with bad credit is to increase your down payment.  Getting enough money for a down payment is one of the biggest obstacles to buying a home.  

If you’re struggling financially, there are several down-payment assistance programs that you can use.   Figuring out how to come up with the money for a down payment shows commitment and tenacity to loan officers – an impressive quality for 1st-time home buyers with bad credit. 

Overall, the best approach for increasing your home loan approval chances is to be reasonable about the house and home loan you can afford.  It’s always better to start small to minimize the risk of losing the house to foreclosure and damaging your credit once more.

Of course, all of these factors are subject to who your lender is and the risk that they are willing to take.  Obviously, the higher your credit score is, the better your chances are of obtaining a mortgage loan.

What compensating factors should I highlight on my loan application to offset my low FICO score?

Purchasing a home with bad credit is not an easy task, but it’s not impossible!  While the decision lies with the lender, there are some compensating factors you can highlight on your application to make your chances stronger:

1. Job Stability– If you’ve been working at the same job, or even the same industry for five or more years, mention it!  Also, let the lender know about regular pay raises and bonuses – upward trends in income are always a good sign for loan officers and shows that you could handle an increase in utilities or property taxes.
    
2. Self-discipline– If you can prove that bad credit is only from your past and that you now have stability in payment history, this will offset a low FICO score.  Some ways of doing this are contributing yearly to a retirement account or setting aside a set amount each month to a designated savings account.
    
3. Proof– Be prepared to show your loan officer proof of regular income or contributions to retirement.  Letters from landlords saying rent was paid on time will not suffice to serve as enough proof in the case of a home loan.
    
4. Increased Down Payment– If you have a down payment that is substantial and bigger than 20% of the loan, you’ll want to highlight this factor as it could be a positive aspect of your application.

Overall, lenders want to finance borrowers who've demonstrated responsibility and have medium to high credit scores.  If you are denied a loan application because of your bad credit,  try building it up over the next few months or years and applying again once it's more stable.

Below is a list of companies that can help you either secure a mortgage or repair your credit.