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Find the Best Bad Credit Mortgage in 2016

Caryn Anderson

When it comes to bad credit mortgage loans, your options are limited. That doesn’t mean you can’t still qualify for a mortgage with a decent interest rate. Mortgages from the Federal Housing Authority (FHA) are among the top options for borrowers with bad credit. Because these loans are insured through the FHA loan program, they present less of a risk to lenders, who can then extend the loans to borrowers with credit scores as low as 580 at competitive rates.

To find the right bad credit mortgage for you, you need to evaluate your credit history, examine your finances and research all available options. Read on to learn more about three of the top bad credit mortgage lenders and about the steps you can take to get yourself back on the path to a positive credit history.

Bad Credit Mortgage Lenders

We chose our top bad credit mortgage lenders based on a variety of factors, with transparency and affordability at the top of the list. When you have a low credit score, it’s challenging to know where you can turn. We identified three lenders that offer excellent starting points in your research process.

AimLoan

AimLoan is an Internet Direct Lender that has funded more than $19 billion in home loans since Vince Kasperick founded it in 1998. With its philosophy of using modern technology to provide transparent terms, low rates and convenient options, this lender offers a good option, even if you don’t have a gleaming credit record.

By taking mortgage brokers and loan officers out the equation, AimLoan is able to offer reduced costs, automated underwriting and a guarantee on total closing costs. The online application takes approximately 20 minutes to complete. Once you’re approved, you receive the option to float or lock your rate, and a representative contacts you with all of the documentation that you require to complete your loan and advance in the 12-step loan process. Available loan programs include the following:

  • Conforming Fixed Rate Mortgages: These loans offer constant interest rates and payment amounts over the term of the loan. Available term lengths include 10-, 15-, 20- and 30-year loans. These mortgages are eligible for sale to Fannie Mae and Freddie Mac, and they must conform to program guidelines regarding the maximum purchasing price.
  • Conforming Adjustable Rate Mortgages: These loans are also eligible for sale to Fannie Mae and Freddie Mac. Choose from 5/1, 7/1 and 10/1 adjustable rate mortgages (ARM) that provide a fixed rate for the first 5, 7 or 10 years of the loan and then adjust every year for the remainder of the 30-year loan term.
  • Super Conforming Fixed and Adjustable Rate Mortgages: These Fannie Mae- and Freddie Mac-eligible loans are available to you if you live in a designated high-cost housing market.
  • Jumbo Conforming Fixed and Adjustable Rate Mortgages: These mortgages are available to select buyers for loans that exceed Fannie Mae and Freddie Mac price limits.
  • VA Fixed Rate Mortgage: A VA Mortgage — which is available to active military, the National Guard, Reserves, veterans and military spouses — offers no money down, 100% financing for home purchases and 90% financing for refinancing a loan. Choose from 15- and 30-year terms.

In addition to the company’s online application, AimLoan also offers a quick, easy-to-use instant rate tool that gives you an idea about the rates you can expect based on the purpose of your loan, your desired property’s value and your credit score. This lender accepts borrowers with scores as low as 620. Because AimLoan is a Certified Upfront Mortgage Lender, you can count on a transparent process with any and all fees clearly stated before you choose your loan.

AnnieMac

While AimLoan offers an automated underwriting system, AnnieMac Home Mortgage offers in-house processing and underwriting, which makes it one of the top options if you prefer working one-on-one with lenders. You can work directly with Licensed Mortgage Loan Originators every step of the way to get personalized loan options that work well for your individual situation.

  • 203K Loans: This type of loan is the ideal option if you’re buying a home that needs significant renovations. It gives you the financing you need to buy and rehab the home in a single mortgage. This loan is offered for owner-occupied homes that are at least one year old, attached and detached single-family residences, multifamily properties that house one to four families and townhouses.
  • FHA Loans: If you have bad credit, this is your ideal option with Annie Mac because it offers lenient credit requirements, competitive interest rates and lower insurance premiums.
  • Conventional/Jumbo Loans: Like AimLoan, Annie Mac offers a variety of loans that are insured by the government through Freddie Mac and Fannie Mae. To qualify for this lender’s conventional and jumbo loans, you need to have excellent credit. Each option is based on Freddie Mac and Fannie Mae eligibility requirements regarding the lending limits.

You can take advantage of the lender’s mortgage calculator to research the cost of getting a mortgage. After answering just a few questions about your credit score, your income and the property, you can get a fast rate quote for an estimate of the rates available to you.

eRates Mortgage

Since it was founded in 1991, eRates Mortgage has offered steady growth and financial stability. Customer reviews give eRates Mortgage high marks in overall satisfaction, with its rates and streamlined loan process receiving multiple mentions. eRates Mortgage offers several home loan options for purchases, refinances and refinances with a cash-out option. Some of the company’s popular loans include:

  • FHA Loans: If you have a low credit score, this is one of your smartest options. These government-insured loans are available if you have a credit score of 600 or better.
  • VA Loans: These mortgages are available to veterans and active duty military members. The VA Home Loan Program doesn’t require private mortgage insurance, allows buyers to finance up to 100% of the value of the home and allows buyers to qualify with zero down payment and a credit score of 620 or higher.
  • Traditional Fixed Rate Loans: The 30-year fixed-rate mortgage is one of this lender’s most popular loan types, although you may need to establish positive credit history before you can qualify. Likewise, the company’s 15-year fixed rate mortgage has stricter credit requirements than FHA or VA loans, but it’s a smart option if you can qualify for a traditional loan and want to save money on the interest.
  • Adjustable Rate Loans: These loans offer a fixed rate for a period ranging from 3 to 10 years before switching to a variable rate that moves up or down according to the market conditions and the Prime Rate.

To apply for an eRates Mortgage loan, call to speak with a purchase specialist or apply online. The lender has an online quote tool that lets you see your estimated rate based on your loan and property type, loan amount, estimated property value and the property’s location. Other tools include an affordability estimator and a mortgage calculator, both of which can prevent you from taking on a mortgage that you can’t afford.

This lender also has guidelines for how long you have to wait before qualifying for a mortgage after serious delinquencies such as a foreclosure, short sale or bankruptcy. Depending on the situation and the loan type, you may need to wait anywhere from one day to seven years from the event. The eRates Mortgage website provides a list of the 32 states in which this lender is licensed to operate.

How to Get a Mortgage Loan with Bad Credit

When it comes to getting a mortgage, conventional wisdom indicates that the higher your credit score is, the better the rates and terms you receive can be. While this isn’t untrue, you do still have options, even if you have less-than-perfect credit. Before diving into the process of getting mortgages for people with bad credit, take a look at credit scores and how they rank.

What Is Bad Credit?

In general, each lender calculates scores differently according to its own underwriting process. This is the reason that most lenders have different guidelines that identify good, fair and bad credit score thresholds. To give you an idea of what “excellent” credit vs. “bad” credit looks like, consider the following estimates:

  • Excellent: Scores above 750
  • Good: Scores between 700 and 749
  • Fair: Scores between 650 and 699
  • Poor: Scores between 600 and 649
  • Bad: Scores under 600

Why Is a Credit Score Important?

Lenders look at your credit score as a snapshot of your borrowing habits, which makes sense because the two most dominant factors that determine your score include the amount you owe on your debts and your payment history. Fair Isaac Corporation (FICO) scores are the most widely used credit scores, and they’re calculated based on your:

  • Payment history (35%)
  • Amount you owe (30%)
  • Length of credit history (15%)
  • Mix of credit (10%)
  • New credit (10%)

As you can see, your record of making timely payments is the most highly weighted of the factors that go into your credit score calculation. Because of this, lenders can visualize a direct correlation between your credit score and the likelihood of you making timely payments in the future.

Improve the Picture

Even if you have major blemishes in your credit report, there are steps you take now to change your chances of receiving loan approval. For starters, request a copy of your credit report. You’re entitled to a no-cost copy of your credit report from each of the three credit bureaus (TransUnion, Experian and Equifax) every 12 months. Reviewing your credit report lets assess your strengths and weaknesses, but it also gives you an opportunity to identify any mistakes that could be dragging your score down. If you see mistakes, notify the credit bureau in writing as soon as possible.

This also gives you the information you need to be able to explain your delinquencies to mortgage lenders. Having a bad credit score doesn’t automatically take you out of the running for a mortgage. In many cases, having adequate income and reasons for the credit problems can help get you approved, especially if the problems were linked to a period of illness, unemployment or some other life event.

Additionally, it’s crucial to begin showing a positive credit pattern now. Start making your payments on time. Pay down debts, if you can, to reduce your debt to income ratio to no more than 43% of your gross income.

For example, if you make $5,000 a month, your total debt including your mortgage payment shouldn’t exceed $2,150. In general, the lower your debt-to-income ratio is, the better your chances of getting approved for a mortgage are. Pay down high-balance credit cards and maintain as many good lines of credit as possible to start re-establishing forward momentum.

Bottom Line

Borrowers with low credit scores often allow the fear of denial to prevent them from even trying to get a mortgage loan. Although your credit score is an important factor, it’s not the only one that lenders use to make their decision.

FHA loans are among the top options for mortgages if you have a low credit score, but these aren’t the only options. There’s a demand in the market, and lenders are beginning to take other factors into account, including the difference between being irresponsible and losing your job or suffering from an illness. Having a bad credit score isn’t the end of the world. Begin proving that you can make on-time payments and start establishing a positive credit history as soon as possible to increase your odds.

Research all of your options and get rate quotes from multiple lenders to find the mortgage with the most competitive rates and favorable payment terms. Above all, avoid getting a mortgage with a monthly payment that you can’t afford. In the end, this can keep you in a pattern of bad credit and financial struggles.

Most experts agree that your mortgage should be no more than 30% of your monthly income. Utilize online mortgage calculators and fast rate quotes to research how much your mortgage payment may be before you sign your loan contract.

You can trust that we maintain strict editorial integrity in our writing and assessments; however, we receive compensation when you click on links to products from our partners and get approved.
Published September 8, 2016
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