Are No Income, Low Credit Mortgages Really Coming Back?

low credit mortgages
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You probably are not surprised to know that mortgage lenders like to lend money to people with high credit scores. A good credit score shows you have a strong record of managing your finances. This indicates a high probability the lender will get a good return on their investment by giving you a loan.

Even though your chances of getting a no income home loan are better with a higher score, there are plenty of solid options for the borrower in 2018 with an average or even poor credit score. Let’s take a look at the most popular options below.

Before we do so, it is important to note a few things:

  • Although you can get a loan with a lower score today, the ‘good old days’ of no income verification loans are history. No matter what type of home loan you get, you will be required to show documented proof of income and that you can repay the loan.
  • Lenders that have too high of a default rate face very heavy penalties from the US government. So every mortgage lender today must do its due diligence on every loan it underwrites. This means you must provide credit information, income, places of employment, W-2’s, pay stubs, and tax returns. All income must be documented.
  • If you have very bad credit with a lot of recent collections, 30-day late payments etc, you will have problems being approved.
  • If you have past credit problems that gave you a bad credit score, but you show reasonable financial stability in the last 12-24 months, you probably can qualify for a loan.

With those thoughts in mind, here are the major options for low-credit mortgages:

Federal Housing Administration – The FHA mortgage loan is the go to finance choice for most people with bad credit scores. Loans are guaranteed by the Federal Housing Administration. They offer very flexible income and credit requirements. You also can get a 3.5% down payment loan for only a 580-credit score, in some cases. Of course, most banks and lenders are looking for score in the mid-600’s, but under 600 is possible if you show financial stability. FHA requires mortgage insurance that is fairly expensive, with a 1.75% upfront fee and a monthly fee on top of it. But on the plus side, an FHA financing has very low rates, often under market rates. This is a great option if you have had past credit issues. A foreclosure or bankruptcy will not stop you either, if these events occurred at least two years ago and you are financially stable now.

Veterans Administration Home Financing – This program is the best option for the active military person or veteran with either good or poor credit. The home loans are backed by the US Department of Veterans Affairs. There is no minimum score required, but 620 to 640 will get you the least amount of hassle from underwriting.  Another huge benefit of this program is it offers financing with no down-payment. Some lenders will finance 100% of the loan even with a very low-credit score. These loans do not require mortgage insurance and rates are lower than FHA. So, they are a fine deal if you can qualify.

USDA House Financing – These are great loans for borrowers who want to buy a property that is designated as rural by USDA. You probably need a credit score from 620 to 640 and cannot have any serious delinquencies in the last few years. One downside of the USDA mortgage program is you cannot make more than 115% of the median income for the area you want to live in. The home must be your primary residence.  This program is available with 100% home financing and there is no mortgage insurance. However, there is an upfront premium of 2%, but it may be financed in the loan.

Fannie Mae Programs – This is the largest backer of mortgages in the US. You usually need a 620-credit score, but you also can qualify in some cases if you have limited credit history. This program is available with a 3% down payment. You do need to meat income limits that will vary based upon the area. There is no income limit for homes in lower income areas per the US Census. For others, the income eligibility will be limited to 100% of the median income for the area. If you put down less than 20%, you must may for mortgage insurance. But your mortgage insurance is removed once the LTV is 78% or less.

Takeaways on Low-Credit Home Financing Today

The bottom line on poor-credit house financing is available if the borrower can check all the boxes for underwriting. But do not expect to qualify for a loan if you have a credit report full of delinquent payments in the last 12 months. Also, do not expect to get a loan without fully documenting your income. With those caveats, it is remains possible today to get a home loan with a low FICO score, but you must bring something positive to the underwriter for consideration.

 

 

References: Guide to the Bad Credit Mortgage Loan

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