Can you buy your first home with bad credit?

Written By: Glenn Michaels, Op-Ed Writer

Some people say yes, but there is a lot more to it. A few years ago you get a subprime loan without much trouble. The mortgage mess has led to a lot more caution in the way home loans are approved these days. If your credit needs work, there are still some things you can do to maximize your chances of getting a loan, but you should really ask yourself some hard questions before you put much effort into finding out what loan options are available.

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One question you need to ask yourself, is buying a home good for you? It’s true that circumstances have changed a lot in the last few years and new loan limitations are making it hard for people to get in over their heads, but at some point you have to ask yourself in light of things your credit report, can you handle the pressures of owning a home.

To qualify, you may have to accumulate a large deposit or accept a higher interest rate than you might like. You might have to wait a couple of years after a bankruptcy or three years after a foreclosure.

In 2013, the United States Department of Housing and Urban Development (HUD) issued some mortgagee letters allowing borrowers that can provide evidence that they were out of work and that was the prime reason for their credit issues, the waiting time was reduced when obtaining Federal Housing Administration (FHA) financing.

Borrowers that had filed a Chapter 7 bankruptcy and can provide evidence that the bankruptcy was due to a financial event such as unemployment (loss of employment) the waiting time was reduced from two years to one year. Borrowers that were in foreclosure due to loss of employment no longer have to wait three years, they now have to wait one year. These changes reduce the waiting time after these economic events as long as there is strong evidence of job loss.

Credit scoring is another issue that can stop a borrower from buying a home or require a larger down payment. Credit scores lower than 620 will normally prevent a borrower from obtaining a conventional mortgage and Veterans mortgage. HUD also changed some of the rules as it pertains to credit scores when obtaining a FHA mortgage.

FHA guidelines now allow a borrower to obtain maximum financing, currently 96.5% for a purchase transaction with a credit decision score of “580” or higher. Borrowers that have a decision score of “500 to 579” are required to put 10% down or have 90% financing. If a borrower has low credit scores they may be required to search for a lender that will offer a FHA loan with such scores.

Another issue with low credit scores is the rate or price of the mortgage loan. The Secondary Market are pricing loans based on “Risk Based Pricing”. All borrowers will have a higher rate or lower rate and/or price associated with their credit score, down payment (LTV), property type, number of units, and geographic location as well.

If a borrower has credit issues it is not the end of the world. It is very important to learn what caused these credit issues. Was the credit issue(s) resolved? FHA requires lenders to analyze the borrower’s credit history and if there are issues beyond the borrower’s control to consider them for a loan. 

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Can a borrower with credit issue buy their first home and obtain a mortgage? Yes they can with work and finding the right lender.

About The Author

Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter ( As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 


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