Buying a home is a huge part of anyone's life, and it's something that can be incredibly rewarding personally as well as financially. But it's also something that requires a major investment of money, and more often than not a mortgage loan is needed in order to secure those funds. Those with bad credit, past foreclosures, and other financial issues often find that it's harder to get a loan than it could be. Luckily, however, it isn't impossible. There are numerous lenders out there offering a second chance to those with poor credit and it's worth taking a closer look at some of them.
Subprime mortgages get a bad rap thanks to their role in the financial crisis of 2007-2008. However, the reality is that for many people this is still a very viable option that's well worth taking a look at. Subprime home loans are called that because the borrower is 'subprime' – a bigger risk than those with higher credit scores. In most cases, subprime mortgages are the most common second chance loan programs.
With these loans, the borrower will need a down payment of at least five percent, often higher than that. Additionally, you should keep in mind that you'll have to pay a higher interest rate than those with better credit scores. This is how lenders offset the risk associated with lower credit scores – by assessing a higher interest rate. This translates to higher monthly payments for the borrower, but in cases where it's your only option this is still worth considering – as long as you know you can afford the loan.
Each of the two options above offers borrowers with poor credit or with past credit mistakes the chance to purchase a home. FHA loans are a great choice if you can qualify for them, but even a subprime mortgage could be an option that helps you. The key is knowing the specifics of your agreement and making sure that you only sign a loan that you know you will be able to pay for throughout the future. You do have options, so don't feel like your credit history is making it impossible to own a home.
This should be the first option looked into for many people. FHA loans are designed for first time home buyers as well as for those with poor credit. An FHA loan is much easier to qualify for and includes a variety of benefits that help it stand out. For instance, you can secure a mortgage loan with a credit score as low as 620 – far lower than the usual standard. Additionally, down payment requirements aren't as strict. While a 620 credit score will require a down payment of around 10% in most cases, those with slightly higher scores could only need a down payment of 3.5%.
FHA loans are backed by the US government, which is why lenders are able to offer the loans at the lower credit score thresholds. Borrowers can even apply for an FHA loan just three years after a foreclosure as long as their credit history has remained clean since then.