August 24, 2023

Home Mortgage Purchasing Info

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Bad credit may seem like it stands between you and a new home purchase. Fortunately, there are ways to get a mortgage even with bad credit.


By taking the proper steps, you can get a mortgage loan with bad credit, and this transaction can even help you to improve your credit for the future. It's important to learn about the process and discover the facts about low credit scores and mortgage lending.

What's a Low Credit Score?

A credit score ranges from 300 to 800 for the 4 different credit reporting bureaus. When considering large lines of credit, like a home mortgage, any credit score lower than 580 is considered high-risk (i.e. “bad”). Many factors go into these low scores, including lack of established credit, missed payments, and the amount of available credit that you have already been given. A number of free credit report websites can offer details on your credit score and the credit history that has impacted it. If your credit score is lower than a 580, there are still options available for mortgages and home purchases.

FHA Loans for Buyers With Bad Credit

One of the best options for home buyers with bad credit is an FHA loan. These loans were established to encourage home purchases for first-time buyers, and they allow people with bad credit to obtain a loan. If your credit score is under 580, you are required to pay 10% down on a home in order to qualify for the loan. For example, if a home costs $150,000, you will need at least $15,000 to get approved for the FHA loans. If your credit score is above 580 but still too low to qualify with traditional lenders, you may be able to obtain an FHA loan with only a 3.5% down payment.


Along with getting approved for the loan, the FHA agreement comes with several benefits. To help make the home affordable, FHA loans often include lower interest rates, lower mortgage insurance fees, and reduced closing amounts.

WHAT KIND OF CREDIT DO YOU NEED FOR AN FHA LOAN?

Borrowers with a credit score of at least 580 can secure an FHA insured loan with just a 3.5% down payment, while borrowers with a lower credit score of 500-579 will be asked to pay 10% of the value of the loan as a down payment.


Under the terms of an FHA loan, borrowers are also required to pay two types of private mortgage insurance (PMI): an upfront payment of 1.75% of the value of the loan, plus up to 0.85% per annum.

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How Do You Get Pre-Approved for an FHA Loan?

Just as it would if you were applying for a conventional loan, your lender will ask you for:


  • Personal information, such as driver’s license, state ID card, or social security number
  • Proof of income, in the form of pay stubs and W2 forms (past 2 years)
  • Bank and investment statements to show you can pay the 3.5% or 10% down payment
  • Other financial information testifying to your ability to make payments, such as bills and reports on additional income sources


When assessing your application for pre-approval, your lender will also pull a hard credit inquiry in order to check whether you meet the minimum credit requirements (of 520 for a 10% down payment or 600 for a 3.5% down payment). A hard inquiry can affect your score for up to 2 years. However, the credit bureaus typically consider all inquiries made within a 45-day period to be a single inquiry. Therefore, if you’re shopping around for FHA loans or you’re unsure whether you’ll be approved, it’s worth applying to all your preferred lenders within a short period of time so as not to cause unnecessary damage to your credit score.

Can You Be Denied a Loan After Pre-Approval?

Pre-approval is a conditional commitment from the lender to provide you a loan to a certain amount, but the lender is not legally obligated to provide the loan. However, if you haven’t yet found a home or if you’re having trouble getting a seller to agree to sell you a home, then it’s worth going through the pre-approval process as this gives you an advantage over buyers who haven’t been pre-approved.


Because of the unique specifications, it’s worth seeking out a top FHA lender that has experience with these loans.

Conventional 97 Loan Requirements

Whether you earn a lower income or are a first-time homebuyer without equity from a previous home, it can be challenging to come up with enough cash for a significant down payment. The good news is that there are programs that limit your down-payment requirement to just 3% without requiring you to get a government-backed loan. These so-called conventional 97 loan programs can help you get into the home you want more easily, but it's important to understand their requirements and also to consider some alternatives before you apply. 

What Is a Conventional 97 Loan?

A conventional 97 loan is a type of mortgage loan that requires a down payment of just 3%. The "97" in the name refers to the loan-to-value ratio of 97% that you'll have when you close on the loan. 


The standard minimum requirement for a down payment on a conventional loan is 5%, and while 3% doesn't seem much lower, it can make a huge difference.


For example, on a $250,000 loan, you'd need just $7,500 instead of $12,500.


There are a few types of conventional 97 loan programs that are available through Fannie Mae and Freddie Mac, including HomeReady loans, 97% LTV Standard loans, and Home Possible loans.

Conventional 97 Loan Requirements

If you're thinking about buying a home, but you don't have a lot of cash for a down payment, a conventional 97 loan may be right for you. But depending on the program you choose, the requirements can differ. Here's what you should know about each of the main programs available.

Credit Score

With all three loan programs, you need to have a credit score of 620 or higher. This is standard for most conventional loans. That said, a higher credit score can help you achieve a lower interest rate on your new loan.

First-Time Homebuyer Status

Both the Fannie Mae HomeReady and Freddie Mac Home Possible loan programs are available to all types of mortgage borrowers. If you want a 97% LTV Standard loan, though, you must be a first-time homebuyer.

Income

The HomeReady and Home Possible loan programs are both designed specifically for low- to moderate-income borrowers. More specifically, your household income must be at or below 80% of the area median income, called AMI for short, based on where you live.


You can look up the AMI for your area by using Fannie Mae's AMI lookup tool.


The 97% LTV Standard loan program does not have a maximum income limit, so anyone who meets the other criteria for the program may be approved.

Other Requirements

All three conventional 97 loan programs require that you complete a homebuyer education course, which you can find through Fannie Mae or Freddie Mac.


Also, Fannie Mae's HomeReady and 97% LTV Standard loan programs are available only for one-unit principal residences, including eligible condos, co-ops, planned-unit developments, and manufactured homes through the MH Advantage program.


With Freddie Mac, you can get a Home Possible loan for one- to four-unit properties, condos, planned-unit developments, and certain manufactured homes.

Alternatives to Conventional 97 Loans

If you're looking for a home loan with a low down-payment requirement, it's important to consider all your options. Here are some alternatives to compare:

FHA Loans

A Federal Housing Administration (FHA) loan requires a minimum down payment of 3.5% and a credit score of 580 or higher.5 However, if you can put 10% down, you can qualify with a credit score as low as 500.6 There's no maximum income requirement, so anyone can qualify if they meet all other criteria.


One thing to note is that FHA loans come with a mortgage insurance premium that you may not be able to get rid of, as you can with private mortgage insurance (PMI).

VA Loans

If you're an eligible member of the military community, you don't have to put any money down on a U.S. Department of Veterans Affairs (VA) loan. And this option is not reserved only for low- to moderate-income earners.

Keep in mind, though, that while the VA doesn't list a minimum credit score requirement, most lenders will have one. The typical minimum is 640, but some lenders may be willing to accept a score as low as 580. Also note that there's an upfront funding fee that can range from 1.4% to 3.6%, depending on your down-payment amount and whether it's your first VA loan.

USDA Loans

The U.S. Department of Agriculture (USDA) loan program is primarily for low- to moderate-income homebuyers. Visit the USDA website to find out what the income limits are. You can also review the agency's eligibility map to find out if the property you're purchasing qualifies for a USDA loan.

USDA loans have a guarantee fee that consists of a 1% upfront fee and a 0.35% annual fee, which doesn't go away like PMI.

First-Time Homebuyer Financial Assistance 101

Buying your first home can feel overwhelming. Finding the perfect home, putting together a down payment, and getting approved for a mortgage - it’s a lot of work and the financial burden adds up quickly. The good news is that first time buyers have special programs designed just for them. We’ll explain everything you need to know about how to qualify for them.

What Financial Assistance is Available for A First-Time Homebuyer?

"A first-time homebuyer can qualify to receive cash that recipients can use to help purchase their first home. The funds can be used towards a down payment, to help pay closing costs, or even to reduce the overall cost of a mortgage.


This financial aid for first-time homebuyers comes in several different forms, but they’re distinct from other types of homebuyer assistance programs in that they don’t need to be repaid. There are no financial strings attached to worry about down the road, making these a great option for those who qualify for them."

How Can You Qualify for First-Time Homebuyer Programs?

There is no single financial aid for first-time homebuyers. As stated on the U.S. Department of Housing and Urban Development (HUD)’s website, “The federal government does not give housing grants directly to individuals. The funds are given to states and certain municipalities, who in turn, distribute the funds to residents.


Different first-time homebuyer options have different eligibility requirements. As the name suggests, they’re typically available only to first-time homebuyers—that is, individuals who have never owned a home before, either on their own or with a spouse.

However, there are some programs that are open to individuals buying a second home, especially if it’s been a few years since you bought your first home. So, it’s worth checking program requirements even if you’re already a homeowner.


The general purpose is to give financial assistance to those who otherwise wouldn’t be able to purchase a home. Thus, some of the qualifications are based on an applicant’s financial situation.   


According to Bankrate, there are several overall qualifications that one would need to meet, to qualify as a first-time homebuyer, and these qualifications can vary based on your lender. Things like credit score and income restrictions may rule out some applicants, while most lenders are looking for applicants with a low debt-to-income ratio. 


Many first-time homebuyer programs have additional eligibility requirements around income, home location, and credit score. These requirements are intended to ensure that the assistance is having as significant an impact as possible and contributing to socioeconomic diversity in the housing market.


Thus, if you are a veteran, buying a home in a rural or economically depressed area, or earn significantly less than the median income for the area in which you’re buying, you may qualify for especially generous first-time homebuyer programs.

Types of First-Time Homebuyer Programs

First-time homebuyer programs can take many different forms. We’ll explore some of the most common types of assistance that first-time homebuyers can receive.

Low-down and 100% financing programs

Alternative down-payment programs make it possible for first-time homebuyers to purchase a home without the stress of putting 20% down. Given that it takes the average American 51 months (4.25 years) to save up for a 20% down payment on a home, a lower down payment or a loan without one can have a big impact.


Many low-down-payment loans such as an FHA loan, allow homebuyers with fair credit or better to put down as little as 3% on a new house. There are multiple low-down-payment programs available through the federal Fannie Mae and Freddie Mac lending programs, including HomeReady, Home Possible, and Conventional 97.


Loans that don't require a deposit enable homebuyers to purchase a home without paying anything upfront. Even closing costs can be financed in most cases. Popular 100% financing options include USDA mortgages, which support home purchases in rural areas, and VA mortgages, which support home purchases by US military veterans.

Mortgage rate discount programs

Some first-time homebuyer options are designed to reduce the overall cost of a mortgage rather than minimize upfront costs. Programs like these can cut the interest rate on a 30-year mortgage by up to 2% APR, which will save buyers a significant amount of money in the long run.


Importantly, a reduced mortgage rate of 2% can also increase a homebuyer’s maximum purchase price by 22%. That makes it much easier for first-time homebuyers to get the home of their dreams rather than settle for something less.


These programs are typically reserved for low-income buyers. Buyers may also be able to reduce their mortgage interest rates by boosting their credit score.

Down payment assistance programs

Down payment assistance programs involve loans that you can take out to finance the down payment on a home, making it easier to overcome the hurdle that a down payment presents to buying your first home. These loans typically do need to be repaid, however, one advantage of down payment assistance programs is that often, they offer very low interest rates, and some may even come with no interest.


In some cases, down payment assistance loans can be forgiven after a certain amount of time. For example, New York City offers a forgivable loan for up to 50% of a down payment, if the applicant meets certain criteria. Such a loan would be forgiven, as long as the homebuyer lived in the home for at least 10 years (or 15 years, depending on the loan amount). 

Closing cost assistance

Closing cost assistance programs can pay up to 100% of the closing costs for your mortgage. That includes all the costs associated with mortgage fees, transfer taxes, and title fees.


That same loan offered by the City of New York also offers up to 100% coverage of an applicant’s closing costs. These aren’t as large as some down payment programs, but they’re often easier to qualify for and can reduce the amount of money you need upfront by thousands of dollars.

Good Neighbor Next Door Program

The HUD’s Good Neighbor Next Door Program offers homes to first-time buyers at half their market value. That’s an incredible deal that ends up reducing your down payment, closing costs, and mortgage interest costs.


The Good Neighbor Next Door Program is only available to teachers and individuals in law enforcement or emergency services. You must purchase a home in the same community where you work and it must be in a designated revitalization area.

First-time homebuyer tax credits

The federal government first offered a tax credit to first-time homebuyers in 2008, in the midst of the Great Recession. Congress is considering relaunching a similar tax credit, the First-Time Homebuyer Act of 2021, which would give first-time homebuyers a 10% refund on their home’s purchase price, up to a maximum of $15,000.


This tax credit has not yet been passed and signed into law. However, in its current form, the tax credit would apply retroactively to anyone who bought their first home starting in 2021.

Deferred mortgages

If you have a deferred mortgage, you don’t need to make repayments until you sell or refinance your home. If you sell your home for more than you paid for it, you can pay off the deferred mortgage immediately. Important to note that the money does need to be repaid.



Deferred mortgages vary in size and typically won’t cover the whole cost of a home. You’ll still need to make consistent repayments on any conventional mortgage you take out to cover the rest of your home’s cost.

Where to Find First-Time Homebuyer Programs

There are a lot of first-time homebuyer programs available, but, unfortunately, there’s no central database to find out which ones you might qualify for. However, you can divide up your search for homebuyer programs into a few categories.


There are numerous federal programs available. These are typically offered through individual mortgage lenders, so you don’t apply through the government directly. The agencies offering first-time homebuyer assistance include HUD, VA, USDA, and FHA, along with Fannie Mae and Freddie Mac.


Many states have their own first-time homebuyer programs, too. Check with your state’s housing department for more details on what programs are available and how to qualify for them.


Finally, many individual lenders offer first-time homebuyer programs of their own. For example, major banks may offer down payment assistance loans or low-down-payment options. 

Take the First Step Towards Your First Home

First-time home buyer programs offer an opportunity to make buying your first home more accessible These programs or loans can come in the form of reduced down payments or 100% financing, coverage of closing costs, and discounted mortgage interest rates. While most have restrictions on who can qualify, there are many options on the market, so be sure to check the fine print, so you can find one that’s right for you.

Find first-time home buyer programs and lenders in your state

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Home Mortgage Calculator Website

MORTGAGE TERMS

Applying for a mortgage involves a lot of confusing numbers, but it's actually the words around those numbers that you should be focused on. Learning and understanding common mortgage terms can make the application process a lot easier.


Along with browsing professional reviews, you can compare lenders and understand options by breaking down specific terms and definitions. Use the following list to help build your knowledge and apply for a loan with confidence.

  • Amortization

    The schedule you set up to pay off your mortgage is referred to as the amortization. These monthly payments typically include the interest payment along with the balance of the home. The amortization of a mortgage is typically broken down evenly over the length of a mortgage. For example, if you have a 30 year fixed rate mortgage, you may have a monthly payment of $1,500 for each month of the 30 years.


    As you plan out your mortgage calculations, your amortization may change based on numerous factors. For example, if you pay extra toward your mortgage each month, the whole amortization will lower and your home will be paid off sooner than you expected. Toward the end of your mortgage term, you could end up with lower payment amounts or fewer payments to make overall.

  • Balloon Payments

    In some cases, your mortgage may be set up as a balloon mortgage. Basically, this means that you will have one large lump-sum payment toward the end of the mortgage agreement. These mortgages typically last 5 to 7 years and have low interest rates to start off. The borrower makes regular payments throughout the course of the term and then pays off the remainder of the home balance at the end of the term. This type of payment plan is ideal for buyers who have saved up a considerable sum of money and can afford the purchase price of the entire home.

  • APR

    As you shop through various home mortgage lenders, you will often see percentages associated with the APR. This acronym stands for “Annual Percentage Rate,” and it represents the amount that you will pay in addition to the mortgage. This rate includes the interest rate of the loan, mortgage fees, and any other charges that may come with the mortgage agreement. Shopping for the lowest APR can help you save thousands of dollars in the home-buying process. If you have bad credit, it may be harder to get a mortgage but it is still possible.

  • Principal

    The principal amount of a mortgage is money that is owed for the house and property. This does not include the interest or APR. For example, if your mortgage is $200,000, the principal value of the home may be set at $180,000 while interest rates and fees add up to $20,000. Knowing the principal amount can help you understand the true value of the home.

  • Mortgage Insurance

    To help protect banks from foreclosures and short sales, many homebuyers will have to purchase mortgage insurance. This coverage will help banks recoup losses when a home falls through or payments are not made. Mortgage insurance is typically added at the closing of a home and is traditionally a one-time fee.

  • Good Faith Estimate

    After applying for a mortgage offer, one of the first things you will receive is a Good Faith Estimate. These estimated costs include several aspects of the mortgage. Along with the total mortgage amount, these estimates will break down various fees that the lender has. It allows you to truly compare the mortgage rates and make an informed decision. Once you receive a good faith estimate, you can decide to move forward with the lending company or choose a different company for your mortgage needs.

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