How To Get a Home Loan With a Low Credit Rating

If you have a low income, a low credit score, or both, getting a traditional mortgage can be difficult or impossible. That doesn’t mean you have to give up on owning a home. The Federal Housing Administration (FHA) and other government agencies have programs designed to help people like you purchase a home, stop paying rent and start building equity.

The first option to look is an FHA loan. The requirements for applying for an FHA loan are less strict than a conventional mortgage or other housing aid options, but there are still some conditions:

If you can afford to make a 3.5% down payment, your application could be approved. A conventional mortgage will require you to pay anywhere from 10% to 25% down payment. The FHA is only asking for 3.5%.

If your credit score is 580 or above, you will need to make a 3.5% down payment.

If your credit score is lower than 580 but not below 500, you can still apply for a loan, but you will be required to make a down payment of 10%.

If your credit score is below 500, your chance of approval is much lower, but you can still apply for a loan by enlisting the assistance of a “non-occupant co-borrower” such as any family member who is willing to co-sign the loan in your behalf. You may also use a state grant or a government grant to help you get approved.

The money to pay off the FHA loan does not have come directly from your personal income. Family members, lenders and any local grant that you may have enlisted for financial assistance can pay off the terms of the loan, which provides low-income families and individuals with poor credit scores more flexibility when it comes to seeking a house of their own.

How do you get started?
Applying for a home loan looks like a daunting task, but the process can be simplified if you break it into steps:

1) Decide what you can afford
The first step is a personal assessment of your current income, credit rating and total cost of living, which includes your monthly expenses and utility bills and allowance for unexpected events. You should also consider the down payment amount, as well as the interest rate that will apply to your terms. With all this in mind, what is the most realistic budget you can set aside for buying a house?

2) Know your rights
Equipping yourself with relevant information is a necessary part of any application process. Homebuyers, renters, sellers and brokers should know the rules and provisions of the Fair Housing Act: Equal Opportunity For All, as well as the Real Estate Settlement Procedures Act or RESPA [PDF].

If your current income and credit standing are low, it is especially important to know your rights as a borrower. Different states have different policies for mortgage borrower’s rights, so be sure to read up on your state’s provisions or seek the advice of a professional home counselor for more details.

3) Consider buying a HUD home
The FHA is a part of the Department of Housing and Urban Development (HUD). If a home buyer fails to pay off an FHA loan and the house is foreclosed, the HUD may offer the home for sale at a reduced price. The HUD Home Store is a good place to start looking for single-family residences and other foreclosed properties that are back up on the market for bidding. HUD properties are sold as is, so you should know the extent of repair work the entire property needs. The HUD portal also provides a helpful directory of useful links where you can seek financial assistance for other housing needs such as renovation, repair, and utilities.

4) Look for a Home that Meets Your Criteria
Once you’ve assessed your budget, you’re ready to start shopping. You can start with locally advertised listings, consult real estate brokers in your area, and use online resources, including those described here. Volunteers of America maintains a listing of affordable homes. You’ll see many options, but remember to stay realistic. You need to stay within your budget and consider location: an ideal home that is too far from your job may not be ideal at all!

When you’ve chosen a property suited for your financial ability, you should talk to a licensed broker to have the property assessed and inspected.

5) Seek other applicable financial assistance
HUD also offers special assistance programs for senior citizens, teachers, persons with disability, and full-time members of the law enforcement agency.

Down Payment Gift Assistance - This is a special program that helps homebuyers cover the down payment cost, as well as other closing costs, through the use of cash gifts. Home sellers are not allowed to give direct funds to homebuyers, but they can choose to gift cash assistance as a workaround solution. The amount of the cash gift allowed depends on the entire loan amount.

Everyday Hero Housing Assistance Fund (EHHAF) - This is a special tribute program to teachers, social workers, firefighters, doctors, nurses, medical staff, and police officers, who are considered everyday heroes in our neighborhoods. This type of assistance helps homebuyers with closing costs when finalizing a deal on any suitable property of choice.

Housing Aid For Senior Citizens - Senior citizens may choose to look for additional assistance options through HUD.

Local, State and Private Grant Programs - These can provide critically important assistance to would-be homeowners. Start with this list and be sure to look for any programs specific to your area!

What requirements should you prepare?
You will need to submit certain records and documents to support your loan application. It is best to compile all of your requirements even before you shop around for a possible house. You will need the following:

Social security number
Recent pay stubs or receipts
W-2 (Wage and Tax Statement) forms
1099 (Miscellaneous Income) forms
Tax returns for the past two years
Profit/loss statement
Bank records
Credit card statements
Loan/investment statements
Retirement statement
Bankruptcy/alimony documents
Proof of ownership for real estate

Looking for a suitable home can be a long and confusing process. Understanding and using the many assistance programs available to low-income home buyers can make it seem even more confusing, but it’s well worth the time and effort. The HUD reports that the number of applications for FHA loans has quadrupled since the agency’s inception, which indicates that more low-income families are working through the system and have successfully moved into homes of their own because of the many types of assistance offered to them. Remember that these programs exist to serve people like you. Others have used them effectively, and so can you.

Do not hesitate to get in touch your local FHA for further instructions on applying or processing your application.