You have bad credit so you think you’ll never get a mortgage. Did you know that government mortgage programs cater to those with less than perfect credit? Don’t give up your search for a mortgage before looking into these great loan programs.
FHA Loans are a Popular Government Mortgage
FHA loans have the reputation of a first-time homebuyer’s loan. However, they are really for anyone. You don’t have to be a first-time homebuyer. This could be your fifth home and you could still use an FHA loan.
The minimum credit score for FHA loans varies. According to the FHA, you must meet the following:
- 580 credit score to qualify for a 3.5% minimum down payment
- 500 credit score to qualify for a 10% minimum down payment
Keep in mind, though, this is the FHA’s minimum guidelines. Lenders are free to require higher credit scores. You’ll find some that allow scores this low, though, if needed.
In addition to your credit score, the FHA lender will look at your credit history. Namely, they look for bankruptcies and foreclosures. These events don’t prevent you from getting an FHA loan. However, they could affect when you can get the loan. The FHA requires the following:
- Waiting period of 2 years after a bankruptcy discharge
- Waiting period of 3 years after a foreclosure
In addition to the waiting period, you’ll have to prove that you overcame any financial obstacles. You can do this by proving a timely payment history on any new accounts. It may be hard to get a new credit card at first, but start small.
- Apply for a secured credit card and use it. Pay the full balance off each month. This will help build up your credit score.
- Next, apply for an unsecured credit card. Again, use it for necessary expenses and pay it off in full each month.
If you have a few credit accounts for a year or two, your credit score will increase and you’ll become a better risk for lenders.
How the FHA Loan Helps
FHA loans provide you with flexible financing with only a 3.5% down payment. On a $200,000 loan, this means just a $7,000 down payment. Compare that to the 20% conventional loans require for someone with bad credit. You’d owe a $40,000 down payment! That’s a $33,000 difference. Even with the FHA closing costs, you wouldn’t come near that amount with the FHA loan.
Something to keep in mind, though, the FHA does charge upfront mortgage insurance and annual mortgage insurance. On a purchase, you’ll pay 1.75% of the loan amount. On a $200,000 loan, you’ll pay $3,500. You’ll also pay insurance monthly. The annual insurance equals 0.85% of the outstanding principal balance. Initially, on the $200,000 loan, you’d pay $1,700 per year or $142 per month.
USDA Loans for Rural Buyers
Another popular government loan is the USDA loan. However, this is only for buyers in a rural area. The USDA defines rural differently than you might. They base it on the latest US Census and the proximity of the area to the city lines. You can determine if an area you want to purchase a home in is rural by viewing the USDA map.
The USDA does require a slightly higher credit score than FHA loans, though. They require at least a 640 score. Aside from the score, they are fairly lenient on credit history, though. However, they have long waiting periods after a serious economic event:
- You must wait 3 years after the discharge of a Chapter 7 bankruptcy
- You must wait 12 months after filing for Chapter 13 bankruptcy and have proof of timely payments on the plan
- You must wait 3 years after a foreclosure.
The USDA does allow for special circumstances though. Let’s say you fell ill and were unable to work for 6 months. If you filed bankruptcy or lost your home as a result, you could prove that it was circumstances outside of your control. If you can also prove that you have since bounced back, gotten back to work, and kept your credit history intact, you may qualify for a USDA loan sooner.
How the USDA Loan Works
While USDA loans are for rural buyers, they are only for people within a specific income range. You cannot make more than 115% of the areas’ median income. You can determine your eligibility here. The USDA takes into account your total household income. This includes everyone living in your home, whether or not they are on the mortgage.
The USDA does provide allowances if you have children, elderly, or disabled relatives living with you. You can deduct $480 from your gross monthly income for every child living with you. Children over the age of 18 only count if they are a full-time student, though. You can also deduct $480 for every disabled person living with you. Last, you can deduct $400 for every elderly person living with you.
One large benefit of the USDA loan, is the lack of need for a down payment. The USDA provides 100% financing because it’s a program for low to moderate-income families. If your income makes you eligible for the program, you don’t need any money down on the home.
Like, the FHA, the USDA charges mortgage insurance. You’ll pay 1% of the loan amount upfront and 0.35% per year, on a monthly basis.
The FHA and USDA loans provide the chance for borrowers with bad credit to get a loan. The government loans are flexible and affordable, making it easy for you to secure financing for the home of your dreams.