Finding a home loan as a first time home buyer with bad credit can be a challenge. If your credit score could use improvement, mortgage lenders will see you as a bigger risk.
When they do provide you with a loan, they will raise the interest rates. As a result, this makes it difficult for you to pay the loan off. However, the federal government provides options for people who want a home but have poor credit.
Home loans for bad credit first time buyers are available, as long as you are eligible for them. There are many programs that the government offers, but below are three that can be very useful if you are a first time home buyer.
For example, the FHA loan is available to people who have a low credit score but are looking to buy a home. There are also added benefits to having an FHA loan. Continue reading below if you want to find out more about the home loans the government has available for you.
Understanding FHA Loans
A Federal Housing Administration Loan (FHA) is a mortgage that has been issued by a lender approved by the FHA. If you are a first time home buyer with bad credit, the FHA loan can be an option for you.
This federally-backed loan is designed for borrowers with lower to average incomes. One benefit to FHA loans is that they require a lower down payment than typical mortgages and can be acquired with a lower credit score.
When searching for home loans for bad credit first time buyers, it is important to remember that you must find a lender that is approved by the FHA. Then, the FHA will guarantee your loan. This means that the FHA will pay a claim to the lender if you default on it.
Furthermore, the guarantee also allows you to obtain your loan at lower costs. This is because you will be paying the FHA guarantee through the monthly premium.
Learn About Navy Federal Credit Union Home Loans (NFCU)
If you are a veteran looking for first time home buyer programs with bad credit, this may be the credit union for you. The Navy Federal Credit Union offers membership to:
- U.S. veterans.
- Active duty military members.
- Certain individuals involved with the Department of Defense (DoD).
Additionally, if you have a family member with an NFCU membership, you may also qualify to receive one of these loans.
If you qualify for one of these home loans for first time buyers with poor credit, there are additional benefits you can receive. For example:
- The loans from this credit union do not have a down payment. This will help reduce your upfront costs.
- It is possible to change your interest rate for a loan if the loan rate decreases. Restrictions may apply.
- You can obtain mortgage loans without a private mortgage insurance (PMI). Having a mortgage without a PMI can lower your monthly mortgage payment.
How VA Home Loan Programs Work
The U.S. Department of Veterans Affairs (VA) provides a variety of home loans. This can be for first time home owners loan with bad credit, but veterans and their families usually take advantage of these loans. Furthermore, the home loans provided by the VA can help buy a home or help refinance a mortgage loan.
There are two types of home loans: VA direct loans and VA-backed home loans. Each loan type provides its own benefits. However, a VA direct home loan allows the VA to be the mortgage lender. With a VA-backed loan, another lender is used. Regardless, you will still need to meet credit score requirements, income requirements and other criteria to receive the loan.
If you are a first time home buyer with bad credit and would like to avoid putting a down payment, a VA purchase loan may be an option to consider. With these loans, you do not need to pay a down payment if the home’s sale price is not higher than the appraised value of the home.
In addition to being exempt from paying a down payment, you may also receive better terms and interest rates on your purchase loan. The purchase loan is a VA-backed loan. Therefore, you will have to take the loan out with a private lender, such as a bank or credit union.
Even as first time home owners with bad credit, it is possible to borrow money up until the Fannie Mae/Freddie Mac conforming loan limit. This will depend on the county, but this can be possible with the no down payment rule. You do not have to pay for a PMI or mortgage insurance premium (MIP), which can also increase your monthly premiums.
Native American Direct Loan (NADL) Program
This specific VA home loan is for the spouse of Native Americans and Native American veterans. Like other VA loans, there is no down payment required. You also do not need to pay for a PMI.
This home loan is a low-interest, 30-year mortgage with a fixed interest rate. As a result, you do not have to worry about an unexpected rise in cost. It is also possible to get more than one NADL for another home in the future.
Furthermore, like the purchase loan, you can borrow an amount up to the Fannie Mae/Freddie Mac conforming loan limit. If you are a first time home buyer with bad credit, it is important to know that this is a direct loan with the VA. Therefore, you must contact your regional VA office to begin the application process.
Cash-Out Refinance Loan
This VA-backed loan is a loan for those who already have a loan. However, with a cash-out refinance loan, you can replace your current loan with one that comes with better terms.
In order to qualify for this kind of loan, you must have a Certificate of Eligibility (COE). You will also need to meet the eligibility requirements for the VA and the lender, such as those relating to:
- Credit standards.
- Whether you will be living in the home you are refinancing.