Owning a home feels like owning a piece of the American Dream. For homebuyers with bad credit in Pennsylvania, that dream can often feel out of reach. Most loans have high credit requirements and sometimes the alternatives can be hard to find. We’ve put together this article to help you find the best options for bad credit home loans in Pennsylvania.
There are plenty of options out there, but first, you need to understand what factors affect your ability to get a mortgage. The first is, of course, your FICO credit score. This is a measure of your history of making payments and your credit utilization. If you fail to pay your bills regularly or have a lot of debt, you’ll likely have a lower credit score. Making regular payments and using very little of your available credit lines give you better chances and more privileges.
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The second important consideration is your debt-to-income ratio. This is a measure of the amount of debt you have accumulated through other loans (student loans, existing mortgages, car payments, etc.) compared to your current gross income. Most lenders want to see your debts take up no more than 40 percent of your income.
But even if your debt-to-income ratio is high and your credit is low, there’s plenty of options for bad credit home loans in Pennsylvania.
I Have Bad Credit In Pennsylvania. What Now?
If your credit score is low, it can be rebuilt, but that will take some time. If your FICO score drops below 600 you probably won’t be able to secure a more conventional home loan. Fortunately, there are other options like getting a cosigner, entering a rent-to-own contract, or seeking out one of the government programs. The government actually wants you to have a housing despite of your credit score, believe it or not. Happy families in their own houses boost the economy and make the government happy like nothing else.
Government Programs
PHFA Home Loan
The Pennsylvania Housing Finance Agency, or PHFA, works with homebuying counselors and participating lenders to provide free counseling and education for prospective (often first-time) homeowners. They also provide several home loan programs that will be very helpful for Pennsylvania home buyers with bad credit.
There are two variations of the PHFA Preferred home loan. The Preferred Risk-Sharing loan does not require mortgage insurance, while the standard Preferred loan requires much lower private mortgage insurance payments than a typical loan. Both of these loans have reasonable credit requirements and can save home buyers a lot of money. Although, sometimes their requirements are but too high.
The PHFA also offers two Keystone Home Loans, which are designed to help first-time buyers secure FHA, VD, or RD loans. We will describe those in more detail below, so stay tuned.
These loans are often available to those with credit scores under 680 provided they complete a required course prior to closing on their loan.
Federal Programs
In addition to state-level assistance, the federal government has a number of programs designed to benefit Pennsylvania home buyers with bad credit.
FHA Loans
The Federal Housing Administration doesn’t lend money to the banks or give out loans directly. Instead, it insures loans that private lenders give out. A government-insured loan comes with more security, so the lenders are willing to have much lower requirements for securing a mortgage. This includes lower credit requirements and down payments as low as 3.5 percent of the total value of the home. FHA loans are a great choice for first-time homeowners and buyers with bad credit or low income. This is the reason why it’s the most popular form of home loan in the country.
VA Loans
As the name suggests, VA loans are only available to veterans and eligible members of the armed forces. However, if you’re in a position to secure this type of loan in Pennsylvania, you should definitely do so. Not only do VA loans have no minimum credit score requirement, but they also allow you to waive your down payment and your ongoing private mortgage insurance payments. This saves you thousands of dollars and allows you to secure a home loan that might otherwise be unavailable to you.
Rent To Own Options in Pennsylvania
If you’re not a service member, your credit’s below the 500 federal minimum for the FHA loan, and you don’t have alternative forms of credit to make up for it, there are still options. One option is taking out a rent-to-own contract on a property. It will allow you to have a place to live while you get ready for a full mortgage. Rent-to-own contracts are rental contracts and have much lower or even non-existent credit requirements compared to home loans. However, they give you the option and opportunity to buy full property in the future.
A rent-to-own contract means that a portion of your weekly rent check will be put towards the principal of the home. Once the lease is up, you will be given the chance to take out a mortgage from a private money lender and buy the property outright. Of course, by this time you will have had plenty of time to save money for the down payment and hopefully repair your credit!
Cosigner on a Home Loan
Another option to consider if you’re not eligible for the programs above and rent-to-own is not for you is co-signing. You can get a co-signer on a home loan in Pennsylvania. If a friend or family cosigns a home loan with you, you can apply for the mortgage as though your credit was the same as theirs. However, this also means that they agree to absorb the risk if you can’t make a payment. So, it’s important to only co-sign with someone you trust and to make sure they understand the arrangement.
First Time Buyers In PA With Bad Credit
If you’re a first-time homebuyer in Pennsylvania and you have bad credit, your best bet for securing a mortgage is probably an FHA loan. After all, that’s what they’re made for. First-time buyers with a credit score of 580 or more will only have to make a 3.5% down payment, which is a significant boon to anyone who hasn’t had time to save up. Conventional loans require larger payment upfront and some credit history. If you have a lower credit score, you can still get an FHA loan, if you have alternative credit. Alternative credit is usually some other proof of your responsibility, like regularly pay your bills. There is always another option. You can make a larger payment of 10% or slightly lower. What do we learn from this? Lenders like their money upfront, the more the better.
Bad Credit Home Loans In PA After Bankruptcy
If you fail to make a mortgage payment and have to file for bankruptcy this will affect your credit score drastically. It will be difficult to repair the damage. It will also be difficult to get another loan in the future because conventional loans require you to wait seven years after declaring bankruptcy. Only then, you can apply for another mortgage.
However, VA loans only require a two-year waiting period, and FHA loans require three years. If you take the time to rebuild your credit during the wait, it will be easy for you to get an FHA loan with good terms.
Assistance Available In Pennsylvania
There’s lots of help that potential homeowners in the state of Pennsylvania can take advantage of. The assistance is often useful whether you’re a first-time buyer or a mortgage pro. HUD-approved counseling is a resource available at the national level, while the state-wide PHFA has a number of free clinics and other assistance for buyers specifically in Pennsylvania. These are great ways to get guidance and to get your questions answered.
Homestead Tax Credit
The homestead tax credit is another resource available that can help make a property more affordable. It lets you withhold a certain dollar amount or percentage of home value from your property taxes. There are some requirements like you’re staying in the home and you’re currently in the process of paying it off. The maximum homestead tax exemption in Pennsylvania is $650.
How To Improve Your Credit Score
Depending on your credit history, it can take years to repair your credit score. It is never too late to get it back up to where you want it to be eventually. You just have to demonstrate that you are a trustworthy borrower.
First, be sure to pay your bills on time every month. This shows lenders that you are financially responsible and that you are capable of making regular payments. If done consistently, this can have a huge effect on your credit score.
Secondly, start paying off some of your outstanding debts. Student loans, existing mortgages, and other forms of credit utilization are all a part of your debt-to-income ratio. You want them paid off as much as possible if you want to secure a home loan.
The most important thing is to be consistent. Maybe you can’t make every payment in full every month, but at least pay off a part of it.
Conclusion
It can often feel depressing or disappointing to try and acquire a mortgage with bad credit. We hope we’ve shown that it is possible to get a bad credit home loan in Pennsylvania. With smart credit repair and the help of one of the programs we’ve described above, you too can make your dream of homeownership a reality.
Additional Resources
Bad Credit Home Loans and How To Get Approved
Credit Requirements
