How to Qualify for a Home Loan with Less than Stellar Credit

There are a variety of circumstances that can lead to a low credit score. Learn how you can get a badcredit mortgage Arizona and qualify for a home loan, even if your credit is less than perfect.

Bad credit can make you feel like a failure. Many Americans who have bad credit report feeling alone, miserable, and almost hopeless. There is a false picture of a person with bad credit that paints him as irresponsible, reckless, and even as a thief. This could not be further from the truth. There are a variety of factors that can lead to a lower credit score. Job loss, divorce, a sudden change in income, or even an old credit card you forgot about can cause your credit score to suffer. Recent statistics released from FICO Inc. show that 25% of the 170 million Americans with active credit accounts have a FICO score of less than 600. This is considered a low credit score and if you have a low score, you can have trouble getting credit cards, car loans, and even store credit accounts.

If you are one of the 42.5 million Americans with a low credit score, you probably assume that homeownership is beyond your reach. However, with new bad credit mortgage Arizona programs as well as federal programs, borrowers can qualify with low FICO scores.

As with any mortgage it is important to analyze the risks and benefits of a low credit mortgage. Once you have decided to stop letting your FICO score hold you back, it is important to know your options. Most likely you will not qualify for a bad credit mortgage through a bank, so it is important to find a reputable mortgage broker. A broker has more flexibility in terms of types of loans that can be offered so you are more likely to qualify via a broker than a bank.

Types of Bad CreditMortgages

Once you have decided to look for a home loan, you need to do your research. There are a variety of home loan programs available to people with bad credit but they all have different features. Analyzing the risks and benefits will help you choose the right program for you.

One type of loan that is available for people with bad credit is a type of FHA loan. An FHA loan is backed by the government and will allow you to borrow about 96.5% of the value of the home you are purchasing. This means that you won’t have to come up with a large chunk for a down payment. In addition, the government backing means that you will be more likely to qualify, even with less than stellar credit. You will pay monthly insurance on your loan. In addition to you principle and interest payments, you will also pay a PMI insurance payment. This will increase the amount of your monthly mortgage payments until you pay off 20% of the loan amount. You can also couple FHA loans with different federal programs that offer down payment assistance or cash back at closing like Home in 5. These programs are constantly evolving and changing, so make sure to talk with a mortgage broker about what you may qualify for.

A second type of loan is an adjustable rate mortgage or ARM. An ARM is offered to subprime borrowers who would not qualify for a traditional loan. It offers a low interest rate at first but then resets to a high interest rate after a specified period, usually 1 to 5 years. Once the rate adjusts your mortgage payment will increase due to the higher interest rate. This can be a good option if you only plan on owning the property short term or if you know you will be able to qualify to refinance your loan at the end of your low rate period.

Another type of bad credit mortgage in Arizona that is available is a hard money loan. A hard money loan is secured through a mortgage broker but is backed by investors instead of a bank. This is especially beneficial for people looking to do a fix and flip or short term purchase. Depending on the merit of the property you are purchasing as well as potential for income, investors will often invest capital, even if your credit score is lower than what is ideal. It should be noted that hard money loans are short term loans only. They cannot be used to purchase a home you plan to live in for any significant amount of time.

Make sure to know your options for home loans with bad credit.

Once you have decided to stop letting your credit score define your homeownership goals, find a broker to work with. Finding a mortgage broker that specializes in bad credit mortgage Arizona will ensure that you are receiving all the options to make owning a home a reality. 

Dennis Dahlberg
Broker/RI/CEO/MLO

Level 4 Funding LLC
Tel:  (623) 582-4444 | Fax: (888) 279-6917

www.level4funding.com

NMLS 1057378 | AZMB 0923961 | MLO 1057378
23335 N 18th Drive Suite 120
Phoenix AZ 85027