Many people with bad credit don’t even bother applying for a mortgage because they assume that they’ll instantly be denied. The truth is, there are options when it comes to getting a mortgage with bad credit.

How to Get a Mortgage with Bad Credit

While there are several options for getting a mortgage with bad credit, there will be compromises you’ll likely have to make. What it boils down to is that you will have to pay more than if you didn’t have bad credit.

Each option for getting a mortgage loan with poor credit has its pros and cons. Let’s get into some of the options you have.

Apply for the FHA Program

The first point to keep in mind is that having a bad credit score, usually under 650, is going to prevent you from a conventional loan approval. The simple fact is that traditional lenders generally steer clear of bad credit.

However, the Federal Housing Administration does have a program to help people who have bad credit get approved for a mortgage loan. It’s important to understand that an FHA loan isn’t actually the FHA lending you money to buy a house. Rather, when you’re approved, the FHA will basically guarantee the loan. In other words, if you are unable to make you loan payment, the FHA will pay the lender.

FHA approval greatly increases you chances of getting approved for a mortgage. However, not everybody will be approved. For a full rundown of the credit requirements for an FHA loan, check out their website.

FHA
Infographic from The Mortgage Reports

Get an Adjustable Rate Mortgage (ARM)

When you have bad credit the fixed interest rate you’ll get approved for will likely be too high and expensive. In order to keep your interest rate affordable, you may have the option of an adjustable interest rate. Otherwise known as an Adjustable Rate Mortgage, or ARM.

An adjustable rate may be a way to keep your interest payments at an affordable rate. However, adjustable rate mortgages aren’t without their risks.

The risk, of course, is that since the interest rate is adjustable, it goes up and becomes unaffordable. Before taking out an ARM be sure and do your research. That said, here are a few questions you should be asking your mortgage lender before taking out an ARM loan.

  • How much your interest rates can fluctuate with each adjustment.
  • How often and soon could your rate possibly go up.
  • Are there any limits on how much the rate could increase.
  • Are there any caps on how much the rate could increase.

Ask Somebody to Co Sign on the Loan

When you get somebody to co-sign on a mortgage loan, you can get the mortgage even if you have bad credit. Keep in mind that the co-signer would be fully responsible if you don’t make the payments.

This is a risky option because it could easily ruin close relationships with friends or family. This is especially true when it comes to a mortgage loan because it’s likely a very large amount of money being borrowed. In general, financial advisors recommend against this for that very reason.

FHA loans also allow for co-borrowers, which are similar to co-signers but don’t hold ownership interest in the property.

Improve Your Credit Score

Out of all the options we’ve discussed so far, simply improving your credit score is probably the wisest choice. Credit repair doesn’t always take a long time. In fact if you follow these credit repair guidelines, you’ll discover that you can increase your credit score over 100 points in a couple of months.

By waiting a couple of months to get a mortgage and focusing on improving your credit, you’re not only going to end up saving a ton of cash, but you’re also improving your situation for the future.

Lastly, keep in mind that a mortgage loan is a huge responsibility and whatever option you choice in order to get a loan will have a lasting impact on your financial wellbeing. Work carefully with your mortgage lender and do your research before making any decisions.