How to Get a Mortgage with a Low Credit Score

July 27, 2011 36 Comments »

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Mortgage Q&A: “How to get a mortgage with a low credit score.”

If you’ve got a low credit score, but are determined to buy a new home (or are looking to refinance your existing mortgage), you may be wondering how to get a mortgage. Or if it’s even possible.

First things first though – how low is your credit score? Are we talking a 660 credit score or a 400 credit score? Everyone seems to have a different definition of low, so let’s start there.

The FICO score range dips as low as 300 and rises as high as 850. The average credit score is somewhere around the high 600s to low 700s at any given time.

I say somewhere because there are always different numbers being cited by different sources, and the data is often outdated. It’s also a moving target.

How Low Is Your Credit Score?

But to get back to my point, you need to assess how low your credit score is to determine your chances of getting approved for a mortgage.

In short, if your score is closer to the bottom of that aforementioned range, your chances of landing a mortgage will become slimmer and slimmer.

Conversely, if your score is simply imperfect and you’re a perfectionist, you might not have anything to worry about. Other than lacking perfection…

Regardless, there are plenty of mortgage options for those of us with imperfect credit, or dare I say, bad credit.

In fact, you technically only need a 500 credit score to get an FHA loan, which is actually a popular choice among homeowners these days for its equally low down payment requirement.

And let’s get one thing straight, a 500 credit score is pretty abysmal.

So if your credit score is below 500, you’ve certainly made some serious financial missteps. And you may question why any lender in their right mind would offer you a mortgage. Sure, they’re generally willing to accept some risk, but within reason.

Is Your Credit Score Lower Than 620?

  • Fannie Mae and Freddie Mac require 620+ credit scores
  • The FHA will go as low as 500, but you need a 580+ score for 3.5% down
  • Most lenders want a minimum credit score of 620 for VA loans
  • Most banks require a 620-640 score for USDA loans
  • Jumbo loans may require scores of 680 or higher

Anything below a 620 credit score is deemed “subprime” by most banks and lenders, not to mention Fannie Mae and Freddie Mac.

That’s right, the minimum credit score to get approved for a loan by that important pair is 620. Anything lower and you’ll need to go back to the drawing board.

For the record, Fannie and Freddie back the lion’s share of mortgages, so a score lower than 620 already eliminates you from something like 70% of the mortgage market.

Long story short, you should aim to have credit scores of at least 620 or higher to ensure all options are on the table. If not, there are still government loans available, including FHA, VA, and USDA.

As mentioned, the FHA accepts scores as low as 500, but keep in mind that if your credit score is below 580, you’ll need to bring in at least a 10% down payment. You won’t be able to take advantage of their flagship 3.5% down loan program, which requires a 580+ credit score.

Additionally, most individual lenders require even higher credit scores for FHA loans, based on their own risk appetite.  So a 500 credit score might not actually cut it in the real world, even if the guidelines permit it.

Recently, a lender by the name of Carrington Mortgage Services began accepting FICO scores as low as 550 for FHA, USDA, and VA loans, though the associated pricing hit is pretty sizable.  And they’re one of the only games in town.

Meanwhile, credit scores of 660 and up are typically required for all other conventional mortgage loans.

For jumbo mortgages, you might be looking at a minimum score of 680 or even 700, with a large down payment also a requirement.  Or a max LTV ratio of 80%.

In any case, it’s recommended that you enlist a mortgage broker, one who can shop your (more difficult) loan scenario around with multiple banks and lenders to secure financing.

You can visit your local bank as well, but chances of getting approved with a low credit score are probably pretty slim.  And having to call bank after bank can be time consuming and frustrating to say the least.

[How to get the best mortgage rate.]

Do you want a mortgage if your credit score is low?

Aside from those who absolutely need to buy a home/refinance, and those with no other place to turn, are you sure you want to apply for a mortgage if your credit score is in bad shape?

Even if you do manage to get approved, your mortgage rate will probably be much higher as a result, and you’ll likely need to come in with a large down payment to offset the credit risk you present to lenders.

You may be better off having someone else with good or excellent credit take out the loan instead, such as a spouse or parent.  Or it may be in your best interest (literally) to wait until your credit score has improved before applying for a mortgage.

It is recommended that you check your credit scores and reports long before applying for a mortgage to ensure you can actually qualify. Doing so in advance will also give you time to fix any mistakes that may show up on your credit report, as changes can take time.

Keep in mind that while credit scoring is very important to successfully obtaining a mortgage, if not the most important factor, it is just one of the many underwriting criteria mortgage lenders look at.

Things like income, assets, and employment history can also make or break you, regardless of whether you have perfect credit or not.

See also: What credit score do I need to get a mortgage?


36 Comments

  1. Colin Robertson January 11, 2018 at 9:33 am -

    Robin,

    I’m not very familiar with the FSA program or its minimum credit score requirement, if applicable. But I would assume like everything else, a better credit score will help expand your options and ideally lower the interest rate as well. Good luck.

  2. Robin January 11, 2018 at 1:58 am -

    I have a 540 to 575 score range and I’m wanting to do an fsa loan to purchase a broiler farm do u know if there would be som options out there

  3. Colin Robertson January 8, 2018 at 1:25 pm -

    Jess,

    Adding your mother would likely only be helpful if you need more income to qualify. One possible scenario would be removing yourself and your 585 credit score from the loan, and having just your husband and mom on the loan (if you need that additional income) to remove your low score from the equation. There are many scenarios but essentially you try to eliminate as much bad stuff as possible using different applicants to your advantage.

  4. Jess B. January 8, 2018 at 12:26 pm -

    My husband and I are looking to purchase our first home. The purchase price of the home is 190k and we have a $20k down payment. We have a combined income of $80k a year. His credit score is a 640 and mine is 585. What do you think are our chances of getting a loan for this house? My mother would be willing to cosign with us and has a credit score of 720. Would that even be helpful?

  5. Colin Robertson December 26, 2017 at 8:21 pm -

    Michael,

    The older collections are probably already being reflected in your low credit scores, which can make it more difficult to get a mortgage and/or increase your mortgage rate. Not sure if they’ll deny you because of them, especially since they seemed to have occurred prior to the loan mod. May want to speak with some mortgage brokers and some banks to see who can offer what and shop around as you normally would. That way you’ll be able to see if anyone has an issue with the previous modification and outstanding collections while also gathering different quotes.

  6. Michael December 26, 2017 at 5:54 pm -

    I have a modified mortgage (Fannie Mae) I’d like to refi after 3 years no payments >30. Our scores are 630 / 642 depending on what score is used. Concern is we both have 3-4 open collections from 5-7 years ago. Will these older collections prevent any options for decent refi. The fact this is a 10year old mortgage showing a bal of 182k when original amount was 174k isn’t helping our scores. All recent accounts show perfect pay history but they’re all new accounts. Thank you

  7. Colin Robertson November 10, 2017 at 4:09 pm -

    Adam,

    There might be some lenders willing to go that low, but getting all 3 scores above at least 550 will likely open a lot more doors. So you may want to see why your scores are low and determine what you do relatively quickly to at least get them another notch higher. Good luck!

  8. Adam Looman November 10, 2017 at 1:15 pm -

    i have a low score of 505 mid of 515 and my highest of 550 i have an opportunity to get my first home at 92000 what chances do i have at securing a loan in California

  9. Colin Robertson October 16, 2017 at 3:02 pm -

    Sam,

    It sounds like you’ve got two things working against you – very low credit scores and short employment history. Together, it might be difficult to get approved for a mortgage, though it depends why your employment history is short and also if the new jobs are in the same field as prior jobs. As far as your credit scores go, same thing. Why are they so low? Can they be improved in a short period of time? If so, you might be in luck, but there are a lot of unanswered questions here. You may want to speak with a lender or broker to see if you can get pre-qualified or at least get a better idea of your approval odds once you make some strides in the right direction. Good luck!

  10. Sam October 15, 2017 at 12:46 am -

    Hi Collin,

    Myself and my Fiancé are currently working to raise our credit scores ( high 400-500), but we both have new jobs. (me-8 months, him- 5 months.) we are trying to save up $5k as a down payment, but I am worried we will still not be approved and we cannot take any more time- we are working with a 6-7(max) time limit. Any advice at all would be extremely helpful!

    Thanks!

  11. Colin Robertson August 11, 2017 at 12:45 pm -

    Gary,

    If you can get your scores above 620, there should be plenty of mortgage options available, it’s just that the interest rate can be a bit higher to compensate for the risk. Of course, you can always secure a mortgage, then refinance to a lower rate once your credit scores improve, assuming rates don’t head much higher during that time.

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