OnPath Credit Union

There’s a common misconception, especially among long-term renters, that having no credit or poor credit prevents you from qualifying for a mortgage and purchasing a home. This is not always the case. Your credit score is not the only stat mortgage lenders consider when analyzing your loan application. Other factors that may influence their decision include:

• Your income
• How long you’ve been at your current job
• Your employment history
• Your debt-to-income ratio
• The down payment you can afford

Academics, bureaucrats and other Louisiana and Federal government officials have long recognized the importance of homeownership in upward mobility. Despite not always feeling like it, the system is designed to help people of all income levels succeed. This is why there are a variety of government programs specifically designed to help low-income individuals and those with less-than-perfect credit qualify for home loans.

Before you give up on the American Dream of homeownership, you should strongly consider having a free, no-obligation conversation with a mortgage lender. The team at OnPath Federal Credit Union would be happy to explain your options and some of the factors that may impact your approval or the rates for which you qualify.

Mortgage Options for People With No Credit or Bad Credit

FHA Loans

These loans are backed by the Federal Housing Administration. This means lenders assume far less risk since if the borrower defaults, the government will step in and make the bank whole. These loans ensure people who would otherwise be denied a loan have a fair shot at homeownership. There are still credit score requirements for FHA loans, but they are lower than many other home loan options. Homebuyers can also put as little as 3.5 percent down on home purchases when they go with an FHA loan.

VA Loans

Active duty military personnel and veterans have access to the generous VA loan program. In some cases, a VA home loan requires no down payment at all, and qualified homebuyers may be subject to no credit score requirements. These loans help ensure anyone who dedicated years of their life to serving the country have virtually guaranteed access to homeownership.

Subprime Mortgages

These loans are a riskier alternative to some of the other poor credit home loan options as they often come with brutally high interest rates and fees. While there are likely some people who will still be better off in the long run getting a subprime mortgage rather than continuing to pay ever increasing rental fees, borrowers should be cautious.

Getting a Parent or Family Member With Good Credit to Co-Sign

If you have a close family member who is willing to put their own credit and finances on the line to help you become a homeowner, having them co-sign your mortgage can be a great way to qualify for a much better rate and terms. Co-signing is a mixed bag as it does tie together familial relationships with financial complications. On the other hand, some borrowers may feel a greater responsibility to their loved one and work harder than they otherwise would to keep up with mortgage payments.

How to Improve Your Credit Score Before You Apply for a Mortgage

Be sure to look at some of our past blogs on the topic of credit scores and how they can be improved to learn more. The most basic first step is redeeming your free annual credit reports from the credit reporting companies. These reports will allow you to see any inaccuracies in your current report that might be artificially dragging down your score. If there are mistakes, correcting them can be the fastest path to credit repair.

For most borrowers, the best thing you can do is:

• Pay all your bills in full and on time.
• Start to pay off your debts, starting with the highest interest debt first (which is often credit card debt).
• Credit utilization, or the percentage of your lines of credit you use, is an important variable for your credit score. Try to use no more than 30 percent of your credit card limits.
• Unless you have no credit and you need to build credit before you can qualify for a home loan, avoid taking out any new loans until you qualify for a mortgage. This means don’t open new credit cards or apply for auto loans until you’ve secured your mortgage.
• Look into debt consolidation if you have many outstanding debts at high rates. OnPath Federal Credit Union has competitive debt consolidation options to help you get your debt under control.

Is It Better to Just Keep Renting if I Have Bad Credit?

While every person is different and there may be scenarios where renting is the preferable solution for you at this time, the answer is usually no. This is especially true when home values are increasing. For many homebuyers, the home equity they passively build through increased property values makes up for paying a higher interest rate. You can also continue working on your credit score after you qualify for a loan and then refinance in a few years to lock in a lower rate and better terms.

You cannot build equity for yourself and your family when you rent – those monthly housing payments are simply gone. When you make mortgage payments, you’re essentially saving money in your home. When you go to sell your home in the future, the principal of your mortgage payments will be paid back to you in the form of equity. Given how home equity works and residential property value trends, purchasing a home is almost always the preferable option if you can qualify for a loan.

The team at OnPath Federal Credit Union would be happy to consult with you about your home loan options. Give our lending team a call at 504.648.2064 to learn more.