Last Updated on May 23, 2023 by Eric Jeanette
First Time Home Buyers With Bad Credit
Many home buyers face various challenges when purchasing their first home. Some of these challenges include low income, no down payment and bad credit.
First time home buyers with bad credit can qualify for a mortgage if they can meet the other basic loan requirements. There are programs available for individuals with bad credit who want to purchase their first home.
First Time Home Buyer Bad Credit Mortgage
There is still home if you are a first time home buyer and a lender turned you down because of your credit scores. It is true that conventional guidelines require credit scores of at least 620 and no lender is permitted to go lower than that for a conventional loan. However, you do have other options.
FHA Loan with Bad Credit
An FHA loan is the most popular loan program for first time home buyers because the guidelines are the most flexible and you can stretch your income to purchase a more expensive home.
FHA loans are extremely forgiving when it comes to credit score requirements. The guidelines permit first time home buyers to have credit scores as low as 580 and still have a down payment of only 3.5%.
You can also have scores between 500-579 and qualify for an FHA loan but with a 10% down payment.
VA Loan with Bad Credit
VA loans are for active military and military veterans who have VA loan eligibility. One of the major benefits of a VA loan is there is no down payment requirement.
VA loans also do not have a specific minimum credit score as per the VA loan requirements. However, virtually all lenders have implemented their own credit score requirements which is why they often tell veterans they are not eligible due to low credit scores.
There are lenders who are willing to accept low credit scores for a VA loan but they are not easy to find.
USDA Loan with Bad Credit
USDA loans are for the purchase of a primary residence that is located in a rural area as designated by the USDA. This loan program also does not have a down payment requirement.
Similar to VA loans, USDA loans also do not have a minimum credit score requirement. The lenders who offer USDA loans all have self imposed credit score minimums.
In addition, USDA loans also have income limits to prevent high income earners from taking advantage of the zero down mortgage program.
First Time Home Buyers with Derogatory Credit
We outlined some programs where lenders have the ability to accept lower credit scores for first time home buyers. However, securing a mortgage approval is not just about the credit score itself. Lenders will also be looking at the items and activity on your credit report.
If there are derogatory items on your credit report, the lender may need for you to deal with some of those items. You will likely be asked to have any disputes removed for example. This may need to be done regardless of whether you believe the dispute is valid.
Working with an experienced loan officer is critical here because getting the right direction will be the difference in whether you are able to gain an approval.
First Time Home Buyers with Credit Events
You may have the credit scores needed to qualify for a first time home buyer mortgage, but if you have a credit event, that could prevent you from moving forward.
A credit event is defined as a bankruptcy, a foreclosure, or a short sale. Each mortgage program will handle these events differently.
For an FHA loan, you will need to wait 2 years from a chapter 7 bankruptcy discharge, but you can move forward with an FHA loan if you are in the middle of a chapter 13 repayment plan.
Foreclosures are more serious in the eyes of a lender and the waiting period will be longer.
Most lenders do not have an appetite for working with borrowers who have recent credit events. However, we do have the ability to help you to get approved in the shortest timeframe possible.
Preparing Your Credit to Purchase a Home
First time home buyers are often young and sometimes uneducated on what it takes to purchase a home and how important it is to keep a good credit history.
To be a homeowner, you will need to be responsible and being responsible starts by focusing on your credit at least a year before you decide to buy a home.
Making payments on time and staying away from collections should be your primary goal. Being sloppy with your bill payments will only hurt you when it comes time to apply for a mortgage.
Your credit scores not only will help determine whether you can get a mortgage at all, but lower scores will result in higher interest rates. This means you will qualify for a lower loan amount and your monthly payments may be higher. This should be enough of an incentive to pay close attention to your financial obligations.
Rather than monitor your credit, you should be tracking and monitoring your required payment dates for car loans, credit cards, etc.
Grants to Buy a Home with Bad Credit
First time home buyers often look for assistance programs or grants to help with the down payment. Each grant program will have its own requirements for approval and often times they are also looking at credit scores.
While most grants will require credit scores in the low to mid 600’s, there are a few that will allow for lower scores. There are many grant programs in each state that you can research. Not all of them can be easily found online. In our article about down payment assistance and grants, we provide you with a head start by listing a few.