The market for subprime mortgages has shrunk drastically since the 2008 financial crisis. As a result, people with bad credit have found it more difficult to qualify for a mortgage, whether for a home purchase or refinancing. Though the market has changed, many great options still exist for those with lower FICO scores. These five loan types remain widely available.
Hard Money Loans
These loans are based on the equity in a property. As a result, they don’t require a high FICO score. Lenders feel the property value sufficiently secures their interests.
Hard money loans are written based on loan-to-value ratios of 65 percent or less. This means you need substantial equity or a large down payment to qualify. They also close very quickly. This makes them ideal for distressed properties. Hard money mortgages are one of the few loans that can be written while foreclosure and bankruptcy cases are active.
Federal Housing Administration (FHA) Loans
With a minimum credit score of 580, qualification for FHA loans is a good bet when your credit score has sunk. Credit scores are negatively impacted by high revolving debt, bad payment history, and life events like bankruptcy or foreclosure. Though some time may need to pass after a life event, you can qualify for an FHA loan despite any of these credit challenges.
Down-payment requirements of 3 percent make these loans obtainable for average folks. Individual lenders provide FHA loans based on federal program guidelines. Each lender has slightly different credit requirements, so you may need to shop around. For more information on the FHA loan program, visit HUD.gov.
Veterans Administration (VA) Loans
VA loans are designed to promote homeownership loans for veterans. Qualification requirements are remarkably similar to FHA loans. As with FHA loans, VA loans are issued by private lenders based on program requirements, so if you are a veteran, consider shopping around with several VA lenders.
One tremendous benefit of VA loans is the no down payment option. This makes it possible to become a homeowner if saving for a down payment is impossible. In a day and age where the majority of Americans live paycheck to paycheck, this benefit is one of the most important.
United States Department of Agriculture (USDA) Loans
USDA loans are often overlooked because people assume they only apply to rural farms. Though USDA loans are great for purchasing a farm or ranch, they can also be used to purchase a home in town. To qualify, the property must be in a small town or city (population less than 20,000). If you like the country or small towns, USDA loans provide bad credit mortgages. One of the best parts, a 0 percent down-payment option is available.
Credit Union Loans
As explained on BankRate, many credit unions offer bad credit mortgage loans. Some credit unions have requirements similar to FHA loans. Others offer low or no down payment loans. Still, others provide loans regardless of FICO score. The caveat is that not everybody is eligible for every credit union. Your credit union may or may not offer bad credit mortgages.
Despite the decline in subprime mortgages, there are still options available. Some lenders are providing loans with low FICO scores. Generally, lower FICO scores require that the borrower has either equity, a large down payment, or a low debt-to-income ratio unless based on one of the above programs. If you are in the market for a subprime home loan, reducing your overall debt load always helps. Cash also remains king. If you have enough cash or equity, a poor credit score can be overcome. When obtaining a loan is an emergency, you can qualify for a rapid hard money mortgage.