You already know that getting a great deal on a mortgage requires having great credit scores. If your credit is not up to par, it is in your best interest to work toward improving it before filling out any loan applications. The alternative is paying considerably more than you could otherwise.
Nonetheless, sometimes people find themselves in time-sensitive situations where a home loan qualification is needed quickly, in spite of serious credit problems. What happens if you’re a potential borrower with a 500 credit score, or some other really low score, and you need a mortgage and don’t have time to improve it? The options aren’t great but, surprisingly, there are options.
Use a Hard Money Loan
Although a traditional mortgage generally requires a certain minimum credit score to qualify, there are some lenders who cater to people with less stellar credit ratings. These so-called "hard money lenders," as they are known, are generally private lenders who may offer loans in instances where a traditional bank would decline.
Hard money loans typically cost significantly more than traditional mortgages because of the risk you pose to the lender.
Typically hard money lenders are willing to underwrite loans by using looser qualification standards for credit and income than traditional banks. Instead of credit and income, hard money lenders are generally more concerned with the value of your property. If the home you are trying to purchase or refinance has a ton of equity, a hard money loan might be a viable option for you.
Keep in mind that hard money loans typically cost significantly more than traditional mortgages because of the risk you pose to the lender. Their much higher interest rates often lead to higher monthly payments, which could become a financial burden. Additionally, it is important to ask whether a hard money loan has a "balloon payment" requirement. A balloon payment might require you to either pay off the loan balance in full or refinance the debt within a short period of time.
Find a Cosigner With Killer Credit
If you need a mortgage quickly in spite of low credit scores, a cosigner with excellent credit would be helpful. For certain loan types a lender might overlook your poor credit if you have a cosigner who can offset your low scores with his or her higher scores. Other types of mortgages may require that everyone on the loan meets the minimum credit score criteria. In these cases, your lender might list your cosigner as the sole borrower on the loan, but could potentially add your name on the title of the home.
You should also understand that you are asking your cosigner to take a big risk by cosigning. Your cosigner will be equally liable for the loan and the mortgage will likely show up on his/her credit reports. As a result, your cosigner is risking credit damage and could even have difficulty qualifying for new loans in the future, especially if you ever make late payments or default on the loan. In fact, there are many people in the credit community who have said that there is really no such thing as a cosigner since both parties are equally liable. In their minds there are simply two obligated parties.
Make a Huge Mortgage Down Payment
If hard money lenders aren't your thing and finding a cosigner isn't an option, you still might be able to qualify for a mortgage with poor credit if you are able to come up with a huge down payment. Certain lenders may accommodate low credit score borrowers with a down payment of 10 percent or higher. Other loan types may require as much as 20 percent down, or more, before a borrower with poor credit scores would be considered.
The more you put down, the better the loan-to-value ratio, which is great for the lender. If the lender has to foreclose on the property because you’re not making your payments, he or she simply liquidates the property and uses the funds to pay off the outstanding loan amount.
But Are Any of These Options Feasible?
If you’re reading this article and thinking that these options aren’t ideal, you’re right. They aren’t the best. If you are saddled with poor credit, it may be worth your while to wait to rebuild your credit and borrow money from a normal mainstream mortgage lender.