How To Get A First Time Home Buyers Loan With Poor Credit

Certified Mortgage Advisor
NMLS 1701021
Published 
March 25, 2020

Poor credit? How to buy a home?

Let's talk about first-time home buyer loans with poor credit. So if you don't have great credit, maybe because of some medical issues or something happened in the past that brought your credit score down, but you want to purchase a home. How do you do that?

First time home buyer loan

So first let's kind of talk about the idea of a first-time homebuyer's loan. So these used to exist a lot more, you know, before 2008. After the housing crash, they don't exist that much anymore. At least not like they used to now ends up happening with first-time home buyer loans is there are some loans in some government loans that have special privileges for home first-time home buyers.

But for most people, first-time home buyer loans don't really exist. Like the. So, if you do have poor credit, something to consider is working on your credit first. And the reason why is because ultimately the whole point of purchasing a home is something that's going to be a good investment moving forward, as opposed to renting.

Consider working on your credit first

So you don't want to come in with a super low credit score. That's going to charge a high-interest rate on your mortgage, right? Because the lower your credit score, the higher interest rate you're going to get the higher, your credit score, the lower interest rate you're going to get meaning safer.

So it's, it's worth considering building your credit score because it might take a lot less time than you think. And even just improving your score sometimes by 20 or 40 points can mean thousands of dollars in savings. I've seen clients who have gone from a 620 credit score to a 640 credit score and save tens of thousands of dollars over the next five years because interest rates are all given based on brackets of credit scores. So consider working on that first.

Consider a Credit Coach

I would recommend working with a credit coach.  Not just a random credit company that sends out letters to your creditors, work with a credit coach. Who's going to actually help you through the process and give you a solid game plan.

VA loan

So with these first-time home buyer loans, what most people are looking for are low down payments. So here are two big low-down payment loans. One is VA and the other is USDA. VA loans are for veterans. So if you're not a veteran, then you're going to have to cross that one out here.

USDA Loan

For USDA, these loans are for rural areas. So you can look at a USDA Loan Map. If you're buying in a rural area and you meet the income limit, you can get a 0% down USDA loan. It's fantastic.

Conventional and FHA Loan

Also, you can go a conventional loan do a minimum of 3% down, or FHA has a minimum of 3.5% down. So these are both great options. These aren't necessarily first-time home buyer loans, but they are going to be in that realm of low-down payments that you are looking for.

Minimum credit scores for your loan options

So the credit score for these loans is 500. So for FHA, USDA, and VA, it's 500 as a minimum for your credit score. The one kind of thing to note here is that FHA, if you have a 500 credit score, you need to put 10% down, as soon as you have a 580 credit score, that's when you can do 3.5% down.

So you can see where, you know, you could buy a home with VA or USDA with a 500 credit score or a 530 credit score. If you have a 580 credit score, you might use something like an FHA loan. You might use USDA, you might use VA. Conventional loans are only, only going to be for a 620 credit score and above.

Down Payment Assistance

So now let's talk about down payment assistance. So down payment assistance is kind of a hot topic. We hear down payment assistance and think, oh, it sounds really great. The problem is there really is no such thing as free money. At least not that I've found all the down payment assistance programs that I've seen tend to cost a lot more money over a period of time, because you're going to receive money maybe as a grant, maybe it's a second mortgage. Maybe it's, you know, something that's forgiven.

But you're going to get charged the higher interest rate because it's a riskier loan. If you're not. Your money into the house. You don't have the, you know, kind of stake in the game or skin in the game. So what ends up happening is you get charged a higher interest rate, and normally it kind of cancels out the effect of the savings on the down payment assistance.

640 would be good for USDA, VA, or FHA

Also, down payment assistance normally requires about a 640. So if you have a 640 score, I would look into USDA, VA, or FHA loans. See if you can get a gift for a down payment, or if you can rummage up those funds instead of trying to get them taken care of by a down payment assistance program because it's going to cost you a lot of money over time.

Budget

Finally, the last thing here is to budget. If you're in this spot where you're w you have poor credit, it means you probably have some other debt that you're working with, and it may or may not be a good time to buy now.

Look at your budget

Well, you might want to look at first is figuring out what does your budget looks like. So that's when you buy a home, it doesn't feel like a curse to you cause you don't want to purchase a home and do everything possible. Get this house. Then it becomes something that has more expenses and requires you to take on more debt, putting you in a further position to have a lower credit score.

It's not worth it. Look at your budget first and see if purchasing a home at having all the money set aside for maintenance and repairs and furniture and everything like that is going to be worth it for you. 

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