Buying a Home with Bad Credit and a Big Down Payment

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Afraid your bad credit score will prevent you from owning a home? Don’t allow a low credit score prevent you from applying for a loan. Home loans are available for people with less than perfect credit. Just don’t be alarmed if they come with a big down payment requirement. 

Can you get a home loan with bad credit?

Put simply, the answer is yes. While every case is different, you need to remember that a “bad” credit score is a relative term. Too often, people mistake low credit scores as “bad.” You may have never missed a payment or collection in your life. But, maxing out a few credit cards will lower your score, giving the illusion of bad credit. When applying for a loan, the agent will look at all aspects, giving you a fighting chance. Or, at the very least, you can receive guidance on how to repair your credit so that you can purchase a home in the future.  If your credit score is just out of reach for our loan program requirements, our in house credit care team may be able to help you, we'll coach you through credit weaknesses and guide you on ways to improve.  

Does a large down payment offset bad credit?

At American Financing, we can work with you to find an appropriate loan to get you one step closer to homeownership. With a big down payment, it is possible to get a home loan with bad credit. Everyone’s situation is unique. So, a mortgage consultant will take the time to understand your needs and will see if there are any loan programs that can be customized to get you into a home. Keep in mind that loan programs have their own minimum credit score requirements (as do lenders). But if you are unable to qualify for something now, there is a good chance that making minimal changes to strengthen your credit will allow for better mortgage options (and easier approval) in the future.

What's the best down payment for a house?

The standard down payment amount used to be 20% for home buyers. That comes out to $80,000 on a $400,000 residence — funds that very few buyers have. Thankfully, lenders no longer require a significant down payment.

Those with good to exceptional credit may choose to put down somewhere between 6-12%. First-time home buyers can achieve their homeownership goals with just a 3.5% down payment through the FHA loan program. There's also the popular VA loan, which requires no down payment whatsoever.

There really is no one-size-fits-all approach when it comes to down payments. If you're purchasing your forever home and have surplus funds, then it probably makes sense to pay more upfront. On the other hand, if you don't have much of a cash reserve, low down payment mortgages and down payment assistance programs will be your best friend.

Getting approved for a loan

Attempting to get a home loan with bad credit can be an extended process. It is important to remember that while the FHA and Freddie Mac or Fannie Mae may require as little as a 580 to get a loan, private firms reserve the right to deny loans based on their own personal restrictions.* Many companies will not lend to borrowers with scores below a 620 or a 600. Though, low scores alone shouldn’t disqualify you from a home loan. It may simply mean that it’s a bit tighter to get approved, or it may take a bit longer to get approved.

 *FHA, VA, Conventional, and USDA loan requirements are subject to change. Jumbo and non-QM loans may be temporarily unavailable. As a result of COVID-19, mortgage investors are unable to support as many loans, meaning underwriting guidelines for government and conventional loans are becoming more strict.  

Other things that can help ensure a home loan with bad credit and a large down payment is a strong debt ratio or a strong history when it comes to collections. To better understand what lenders expect from you in order to qualify for a desired loan amount, try our mortgage loan qualifying calculator.

Nothing should keep you from owning your dream home. By working with an experienced mortgage consultant, you can work to find the right home at the right price. Utilizing all your housing and financing options can get you one step closer to finding your forever home.

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Remedy damaged credit

If you’re serious about rebuilding your bad credit, the first thing you need to do is get a copy of your credit reports from TransUnion, Experian, and Equifax. Everyone is able to receive their credit report for free once annually. 

You can also pay a little more on your credit cards each month. Try to lower the term of the credit card pay off. Or, consider using a secured credit card to rebuild your score. For more ideas, check out tips from WalletHub and or visit our five tips to a higher credit score article.

We can help

It is important to consider all options and to take your time when it comes to the right home loan program for you. Remember, an educated home buyer is a happy home buyer. Our teams of professionals strive to deliver the best service in the industry. Call us today with your home mortgage questions (800) 910-4055.

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