There are lots of reasons we all want to own a home. The tax benefits, the potential to own a long-term asset whose value will appreciate, the freedom of owning a property that’s truly your own…the list goes on and on. But because credit is so important to owning a home, having a bad credit score can make you feel like these benefits will never be yours. But there is hope, as we’ll learn today while discussing the best bad credit home loans in Indianapolis.
Why is credit so important to a mortgage brokers, anyway? Well, it’s because your credit score is determined by your history of paying your utility, credit card, and phone bills (as well as a few other factors such as your existing debts and whether you’ve recently made a lot of hard credit pulls.) A higher score indicates to lenders that you are a stable financial investment, which makes them more willing to lend you money to buy a house. A lower score suggests that you may not make your payments and that the lender may lose money on the loan, which makes them consider your situation more carefully.
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Another thing mortgage brokers in Indianapolis look at besides bad credit is the debt-to-income ratio, which is a comparison of the amount of outstanding debt you have compared to your total gross income.
Now it’s time to answer the question everyone’s probably asking by now:
I Have Bad Credit In Indianapolis. What Now?
Everyone’s bad credit mortgage Indianapolis needs are different. If you’re in a position where you already have a place to live you may consider credit repair, a process which often takes several years but which will allow you to find more favorable terms from an Indianapolis mortgage broker in the future. But if you just can’t wait for a home, you should start by looking at the government programs that will allow you to find home loans with bad credit in Indianapolis.
Indianapolis Neighborhood Housing Partnership (INHP)
We’ve written elsewhere about programs offered by the state of Indiana, but did you know that the city of Indianapolis has a down payment assistance program of its own? The Indianapolis Neighborhood Housing Partnership, or INHP, will pay up to $5,000 of your down payment if you apply for a loan through them.
Down payment assistance can be a useful part of finding a bad credit mortgage in Indianapolis, because if a lender approves someone with bad credit, they are likely to make that person pay a higher down payment. If they make more money up front, there’s less risk to approving the loan. The INHP can help you deal with the high additional costs of a bad credit home loan in Indianapolis.
(If you’re a nurse who lives in Indiana, you can learn more about some nurse-specific down payment assistance offered by the state here. And if you’re an Indiana teacher, look here.)
If down payment assistance isn’t enough and you need a bad credit home loan in Indianapolis right away, you might consider the home buyer programs put in place by the federal government.
FHA loans are a great bad credit mortgage option in Indianapolis, particularly if you’re a first-time home buyer. This nationally available program is a government backed loan that allows the lender to assume less risk when they approve a bad credit home loan. If you default on an FHA mortgage, the government pays back a portion of the loan to the bad credit mortgage broker.
Because there’s less risk, lenders do not place a minimum credit requirement on these loans, although a credit rating of 580 or higher will get you the best terms. You can often find a down payment as low as 3.5 percent – far below the 20 percent asked by most conventional mortgages.
If you have a credit score below 580, you will need to pay a larger down payment (usually only as high as 10 percent) to make up for the additional risk, which is where you might consider pairing an FHA loan with some form of down payment assistance. You might also be able to keep the down payment low by providing “alternative credit” like proof of regular utility bill payments and other evidence that you are a stable financial investment.
The United States Department of Veterans Affairs guarantees loans in a manner similar to the Federal Housing Administration, and predictably, these are known as “VA loans.” This option isn’t for everyone as it is only made available to eligible current and former members of the American military. However, if you are a veteran living in Indianapolis you should definitely avail yourself of this excellent program.
VA loans have no minimum credit requirements and can be found at most mortgage brokers in Indianapolis bad credit. They also waive the private mortgage insurance which you are required to pay for the duration of an FHA loan AND require no down payment in most cases, so they will also save you several thousands of dollars. A great deal if you can get it!
Rent To Own Options in Indianapolis
If you can’t meet the requirements for either an FHA loan or a VA loan, there are a number of rent-to-own options in Indianapolis that will give you a chance to build up your credit before committing fully to a mortgage. Plus, it gives you a place to live in right now!
Rent to own contracts are rental contracts which means they have lower credit requirements and are overall much easier to find than a full mortgage. The biggest difference is that you will have to pay an additional potential options fee up front much like you would make a down payment on a bad credit home loan (though the amount is usually much less.) After that, you can have a certain portion of your monthly rent check put towards the principle of the home and be given the chance to buy the property outright once the lease is up. You will have to find additional funding at that point, but at least you’ll have had time to repair your credit and try for an FHA, VA, or INHP loan.
Cosigner on a Home Loan
You can also try to find someone who is willing to cosign your bad credit home loan in Indianapolis with you. The presence of the cosigner’s credit score will boost your own, granting you more favorable terms on the Indianapolis bad credit mortgage. However, this is a major commitment for the cosigner to make. They basically become responsible for the mortgage, and any missed or late payments will impact their credit as well. For these reasons, a cosigner is usually a family member or a longtime close friend.
First Time Buyers In Indianapolis With Bad Credit
If you’ve never bought a home before in Indianapolis and you have bad credit, your best option for a bad credit home loan is almost certainly the FHA loan program. FHA home loans can make the dream of home ownership a reality for first-time low income buyers who haven’t saved up for a down payment and who might have bad credit thanks to their lenient requirements, small down payments, and other benefits.
Bad Credit Home Loans In Indianapolis After Bankruptcy
Even if you have a bankruptcy or foreclosure in your past, working hard paying off debt is a sure fire way to get that score back up. But the biggest problem with having to file for bankruptcy isn’t the damage it does to your FICO score (though that damage is significant.) It’s the fact that you have to wait seven long years between declaring yourself bankrupt and applying for a new mortgage.
Fortunately, home loans in Indianapolis that are designed for bad credit can help you out in this situation. FHA loans reduce that seven year waiting period to only three years, and VA loans reduce it even further to two years. So if you’re taking those 2-3 years to improve your credit as we describe in the next section, you should have no trouble finding a loan.
How To Improve Your Credit Score
If you’re looking to improve your credit score before (or even after) trying for a home loan for bad credit in Indianapolis, there’s a couple ways you can get started right away. First, start paying your bills on time every month. This demonstrates that you are a responsible debtor and a stable financial investment, which signals to Indianapolis mortgage brokers that they will make their money back if they give you a home loan.
The second important piece of credit repair is paying off as many of your existing debts as you can in order to close off some of your lines of credit utilization. This step also improves your debt-to-income ratio, so it’s really a win-win!
Assistance Available In Indianapolis
We hope that this article is a helpful starting point, but it’s important to get home buyer assistance on every step of your journey to becoming a homeowner. HUD-approved counseling agencies can give you personalized home buyer assistance and help you with specific questions, and organizations like the INHP will regularly hold seminars for bad credit first time home buyers in Indianapolis. Consider taking advantage of these resources in the future!
We hope you’ve learned a bit about bad credit home loans in Indianapolis, Indiana and that you’re maybe even on your way to securing a mortgage of your own! Remember, there’s nothing quite like owning a home, and no matter how discouraging the journey may feel, it will all be well worth it in the end.
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