John E. Pytte Oct. 9, 2015

country houseBorrowers who have low credit scores often mistakenly believe that it is impossible for them to get a mortgage, so they never make the effort. This can be a serious financial mistake, especially if you're struggling with high rent payments that could otherwise be building equity in the form of a home loan.

This is not to say that there won't be unique challenges, especially for lower-income applicants. But obtaining a mortgage for bad credit is far from impossible, and in some situations, it may make more financial sense than continuing with a rental agreement.

Types Of Mortgages For Bad Credit

The most straightforward option when trying to get a mortgage for bad credit is to apply for an adjustable-rate mortgage from your preferred lender. The goal here would be to obtain a lower initial interest rate than comparable fixed-rate mortgages, and then rebuild credit as quickly as possible while the initial rate is available so that you are ready to refinance before a potential spike in the rate. There is definitely some risk using this method, but if you have a stable source of income and the loan cap is reasonable, it is an option that can work out to your benefit.

The Department of Housing and Urban Development (HUD) also offers some programs that can help you get a mortgage for bad credit. The primary way to do this is a Federal Housing Administration loan. Borrowers with a credit score of 580 or better can qualify for one of these loans with a 3.5% down payment, and scores as low as 500 will be considered if the buyer can put at least 10% down. If you're interested in a "fixer upper", you might consider the HUD 203(k) loan program. This is a program designed to encourage the revitalization of struggling neighborhoods by offering very favorable terms to those willing to put some money into repairs on an "eyesore" property.

There are also two alternative forms of financing to consider. One is the "rent to own" arrangement, where a portion of each month's rent is set aside in a fund that you can eventually use to purchase the home. The other is "seller financing", where a homeowner who no longer owes any money on their home can take payments directly from a buyer. Sellers in these situations are often more willing to overlook bad credit provided you can demonstrate you have ample income.

No matter which of these paths you choose to explore, keep in mind that you'll always get better terms and a lower interest rate if you are prepared to put forth a larger down payment. Having a good, stable income and putting 10 to 20 percent down can go a surprisingly long way toward easing concerns about your credit. If you don't have that kind of cash on hand, you may be able to borrow the money from family or friends at no interest. If you go that route, just be sure to have them sign a letter indicating the loan amount is a gift rather than a standard loan.

Challenges to Expect

Taking on a mortgage for bad credit makes a lot more sense for moderate to high-income applicants. There's no two ways around it - you're going to have higher payments than other applicants if your FICO score is lower than 630 or so.

While the initial payments may seem like they are too high to make the mortgage worthwhile, bear in mind that you can refinance in as little as one year. If you're able to temporarily shoulder the burden of higher payments and are certain that you'll be rebuilding your credit during the first year or two of home ownership, it may actually make more financial sense in the long run to bump up your housing budget and make small cuts elsewhere to compensate

You also might be able to help your case tremendously by pulling and reviewing up-to-date copies of your credit report from the three major bureaus - Experian, TransUnion and Equifax. The Fair Credit Reporting Act requires that each of these companies provide you with one free credit report every 12 months, and you can request them online at It's important to review these for outdated and erroneous accounts, as removing these can significantly boost your credit score (which translates into a much lower interest rate).

Money Talks

The economic crash still isn't very far behind us, and many lenders fully understand that some people who took large hits to their credit during the recession, aren't really all that much of a risk. If you have adequate income and you can put up a sizable down payment, a reasonable mortgage is definitely within reach.

If you are seeking relief from your debt in the state of Georgia, contact John E. Pytte today for a free consultation. We can find a solution to put you back on the road to financial freedom.