How to Get a Mortgage with a Low Credit Score

July 27, 2011 No Comments »

low

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 looking to refinance your existing mortgage), you may be wondering how to get a mortgage.

First things first though – how low is your credit score? Are we talking a 660 score or a 400 credit score?

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.

I say somewhere because there are always different numbers being cited by different sources, and the data is often outdated.

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 you’re score is closer to the bottom of that range, your chances of landing a mortgage will become slimmer and slimmer.

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

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

And a 500 credit score is pretty abysmal.

Credit Scores Below 620 Are Considered Subprime

Heck, anything below a 620 credit score is considered “subprime” by most banks.

So if your credit score is below 500, you’ve certainly made some serious financial missteps.

But keep in mind that if your credit score is below 580, you’ll need to bring in at least a 10 percent down payment to obtain an FHA loan.  You won’t be able to take advantage of their flagship 3.5 percent down loan program.

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.

Recently, Carrington 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, Fannie Mae and Freddie Mac want a minimum 620 credit score, and 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/refinance, and those with no other place to turn, are you sure you want to apply for a mortgage if your credit score is shot?

Even if you do 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 risk you present to lenders.

You may be better off having someone else with excellent credit take out the loan instead, such as a spouse or parent.  Or it may be in your best interest 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 will also give you time to fix any mistakes that may show up on your credit report, as changes take time.

In summary, keep in mind that while credit scoring is very important to mortgage lending, 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?

Comments are closed.