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 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I say somewhere because there are always different numbers being cited by different sources, and the data is often outdated.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.
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.
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.
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/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.
Things like income, assets, and employment history can also make or break you, regardless of whether you have perfect credit or not.