Government Home Loans poor credit

With a little help, borrowers with poor credit may still be able to get a home loan.

Having poor credit should not deter you from seeking a mortgage loan. In fact, some government programs exist to help distressed homeowners keep their property or enable poor-credit borrowers to buy a home. Even without the help of the federal government, borrowers with poor credit can take steps to increase their chances of home loan approval.

Obtain a copy of your credit report and dispute any false information. According to the Fair Credit Reporting Act (FCRA), everyone has the right to obtain a free annual copy of his credit report from the three major credit bureaus, Equifax, Experian and TransUnion. In addition, the FCRA allows you to dispute and request the removal of false information. While this process may affect your credit rating minimally, it can be an important step in rebuilding your credit rating and obtaining new credit lines.

Collect and submit all relevant information regarding income and financial status. Having poor credit may be a result of a one-time extenuating circumstance such as job loss, death or divorce. In the time following this financial pitfall, you may have recovered by saving and acquiring valuable assets, or found a new job. Submit all evidence regarding your newfound financial strength to your lender, including recent pay stubs, W-2s, tax returns and a financial worksheet that summarizes income and expenses, as well as assets and liabilities. This paperwork may help you negotiate better loan terms with your lender and increase your chances of approval.

Get a cosigner on the loan. A cosigner must be a close friend or relative with good credit and a sufficient financial cushion. A cosigner may help your chances for loan approval and may even help you obtain better terms. However, note that a cosigner will be held accountable for the mortgage should you default on your mortgage, and the impact on credit and even taxes will be applied to you both.

Apply for an FHA-insured loan provided by an FHA-approved lender. Because of the government guarantee, FHA loans allow lenders to serve clients who are otherwise considered “high-risk” because of an adverse credit event such as a foreclosure or bankruptcy. FHA loans do not follow the same strict Fannie Mae and Freddie Mac underwriting guidelines used by conventional mortgage lenders. Furthermore, FHA loans require a smaller down payment than conventional loans (about 3.5 percent versus 20 percent), and the funds can be borrowed or given as a gift or grant by a relative or nonprofit.

Tip

• FHA loans with a minimum 3.5 percent down payment require a borrower to have a credit score of at least 580. Down payments rise to at least 10 percent for borrowers with scores under 580.