Most credit unions and lenders will tell you that you’ll be unable to qualify for a loan when you have a FICO score under 620. The truth however, is that getting a mortgage is still possible even with poor credit.
Sure, you have the option of getting a bad credit mortgage, but most banks and credit unions don’t typically offer this. Besides, it might not be the most ideal option for you, anyway.
There are other alternative paths you can take towards homeownership, depending on how bad your credit actually is, and what caused it to drop.
Get a referral
Try to request a referral in case your regular mortgage broker is unable to help.
Many lenders who have been around for quite some time typically have contacts who work in the subprime market. There’s a good chance that you can get a good referral that leads to a lender who’ll provide you with a good mortgage.
Work with a bad credit mortgage lender
You can always get a bad credit mortgage even if you have poor credit. Keep in mind however, that the rates and terms you’ll get tend to be unreasonably high.
Remember to do a background check on the mortgage broker you’re planning to deal with by referring to your state’s licensing board, so you can find out if you’re working with a reputable company. Avoid getting a hard-money loan from a loan shark at all costs.
Treat a bad credit mortgage as something temporary
If you do decide to go with a bad credit mortgage, approach it as if it’s a temporary situation.
But don’t get a short-term loan. Instead, try to pay on the loan for at least two years or so while you try to improve your credit. By then, you might be able to get a decent refinance at a more budget-friendly rate.
Additionally, try not to get a mortgage that comes with a prepayment penalty, unless that’s the only option available. You might end up paying additional interest worth six months if you pay the loan off early.
Delay your home buying plans for the meantime and build more savings
You may want to consider waiting around three years or so before applying for a mortgage, especially if you’ve just successfully completed a short sale. You’ll be able to get a better rate if you can wait.
According to Fannie Mae guidelines, short sale sellers will be able to qualify for a loan in four years, as long as they manage to maintain good credit following the short sale, or even in two years in some situations. The FHA requires only three years.
Even if you filed for bankruptcy, qualifying for an FHA loan after a few years is possible, as long as you improve and maintain your credit after the discharge.
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