Mortgage Q&A: “How to get a mortgage with a low credit score.”
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I say somewhere because there are always different numbers being cited by different sources, and the data is often outdated.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.
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.
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.
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.