How Can People With Bad Credit Get a Mortgage?
After the housing crisis that began in 2008, lenders increased the requirements for approving loans--especially since one of the causes of the crisis was that many homeowners could not afford to pay their mortgages. One of these more stringent requirements was a good credit score. Lenders use your credit score to predict how likely you are to pay off a mortgage. If you have a bad credit rating or history, your application for a mortgage might be turned down. If you do get approved, the interest rate and loan fees will almost certainly be higher if you have a low credit score. However, there are ways to get a mortgage despite a bad credit history.
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Mortgage Programs
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The federal Housing and Urban Development Department (HUD) provides help for people who want to buy new homes. HUD programs can help you find a loan with comparatively flexible requirements. Go to the agency's website (see Resources) for a list of mortgage programs you may apply under. Your state or local governments may have additional mortgage aid programs for people with bad credit ratings. HUD's website has a section (see Resources) that lists mortgage assistance programs by state. For example, homeowners in California can apply for housing choice vouchers to help them buy a home. Another example is the Chicago Partnership for Affordable Neighborhoods (CPAN), which provides help for first-time buyers and people with poor credit.
Counseling Agencies
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HUD sponsors housing counseling agencies throughout the U.S. that provide free or low-cost advice for people planning to buy a home. These agencies can help you find the best mortgage provider, mortgage aid program and other assistance (see Resources). There are also local and state agencies that provide free advice. For example, the California Housing Finance Agency provides free advice for California residents. Check with your city or county housing agency to learn about assistance programs available in your area.
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Higher Downpayments
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Lenders may approve mortgages for people with bad credit if they can pay a higher downpayment on the property. Lenders will often ask subprime buyers (people with bad credit) to put down 20 percent or more of the home's price. A large downpayment means less risk for lenders. The California Housing Finance Agency advises buyers to consult with lenders about downpayment aid programs. (See Resources).
Co-Signers
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Lenders may approve a mortgage for a borrower with bad credit if she can find a co-signer with good credit rating. A co-signer agrees to pay the loan if the main borrower defaults. However, co-signers should think carefully before agreeing to take on this responsibility. According to the Federal Trade Commission, as many as three out of four cosigners end up paying the loans they co-sign for.
Subprime Lenders
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Subprime lenders specialize in borrowers with bad credit. They offer loans with high interest rates and larger opening and closing fees. If you have a bad credit rating, a subprime loan might be your only option, but read the fine print to make sure that you can afford the monthly payments. The last thing you want is to inundated with fees and penalties you didn't expect. Since the housing crisis of 2008, the number of subprime lenders has dropped dramatically. However, some companies still provide this service. For example, Atlantic Home Loans and E&G Financial Services in New Jersey still advertise subprime mortgages, as does Gold Coast Funding in California.
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