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Getting a First-Time Home Loan with Bad Credit

Buying a home is something most Americans look forward to in life, but are hindered by ghosts of the financial past. When you have debt and poor credit hanging over your head, it’s hard to get approved for credit, let alone a mortgage loan. Being turned down for traditional loans from banks and other lenders can take the spirit out of any person looking to buy a home. But there are things you can do to boost your chances of finally purchasing your first home. Avoid applying for loans just yet because each credit report inquiry will have a negative impact on your score.

Understand Your Credit Score

In order to increase your chances of getting approved for a loan, it’s recommended that you take time to review your credit report so that you can begin improving it. The sooner you start, the better. If your credit score is below 600, you are going to have a hard time getting a loan for your first home purchase. Scores that are around 620 are less of a borrower risk, but it isn’t until your credit rating reaches 640 and above when it enters into the safe zone for lenders. Once you have your eyes set on your goal, you can begin making moves to get your credit rating there.

Fixing Your Credit Report

In order to raise your credit, you’re going to have to eliminate the negative items on your credit report. You can order your credit report for free from all three credit bureaus. Or you can go through the IRS to obtain it. If you want quicker access, you can pay a small monthly fee to see your credit report online. If you see any discrepancies, dispute them, so that they can be removed (typically takes 30 days). This includes items you don’t know and those that were already paid off.

Paying Down Your Debts

Once you have cleaned up your credit report, it’s time to take care of the real debts that you have listed there. You can either contact the creditors yourself or hire someone to do it for you. The idea is to negotiate with the creditors to pay a smaller lump sum payment or to set up a payment arrangement. As you pay off the debts completely and/or little by little, your credit score will increase. If you have open credit card accounts, try to pay down their balances as much as possible, if not completely. Make sure to leave your old credit card accounts open, so that your credit history is deep.

FHA Loans for Bad Credit

Once you have gotten your credit score up a bit, you can start shopping for a home. When you’re dealing with bad credit, you can apply for an FHA loan. This is more lenient than the traditional lenders who would typically deny applicants who have poor credit. You will need to have a credit score that is at least 640. Be prepared to pay a 3.5 percent down payment. Since you’re a first-time homebuyer, you’ll qualify for down payment assistance, which in some cases will allow you to purchase with no money down.

VA Mortgage Program for Bad Credit

Another loan that is available to people with less-than-perfect credit is the VA mortgage loan. This too is designed with the first-time homebuyer in mind, but more specifically for armed services vets. There are over 29 million veterans in America who qualify for this type of financing. In some cases, you’ll be able to get a mortgage with no money down and with very low interest rates. If you are currently in active duty, the reserves or are the spouse of a vet, you too are eligible for this type of loan.

Qualifying for First-Time Homebuyer’s Programs

There are programs available for first-time homebuyers that you can check into. These offer great benefits, like restricting lender fees, low interest rates, subsidized interest and low to no down payments. These programs also typically have restrictions. For instance, some have income restrictions and caps on how much a home can cost. The available first-time homebuyer’s programs that are available include:

  • Fannie Mae HomePath
  • Fannie Flex 95 Financing Program
  • USDA 100% Financing Program

When it comes time to buy your first home, don’t forget to get your finances and credit history in order beforehand. This can increase your chances of approval and getting great deals on your mortgage.

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