Let’s cut to the chase! Regardless of what you may have heard, it is absolutely possible to get a mortgage even if you have bad credit. But remember, the options are limited, although getting help from reliable credit repair service providers isn’t. First off, consider getting your mortgage locked in right away before there’s an increase in interest rates and property prices if you’re all set to buy a house.
What is a bad credit score to get a mortgage?
The one factor that lenders rely on when assessing a mortgage application is the candidate’s credit score. If you’re wondering what a credit score is, it is a three-digit number ranging between 300 and 850, depicting how likely you are to pay your dues and bills on time.
(Learn more about credit scores.)
Anyone with a credit score lower than 620 requires special handling when they need to get a mortgage. Even though it is considered a fair score, it is too low for a conventional mortgage.
In all honesty, if you have a credit score lower than 620, you’ll need to use a government-backed loan program.
What credit score is too low to get a mortgage?
Mortgage lenders trust two credit scoring systems, FICO (Fair Isaac Corporation) and VantageScore 3.0. Both the systems establish a range and assign grades from ‘very poor’ to ‘excellent’ for credit scores.
According to the FICO credit scoring system, you can qualify for a government-backed Federal Housing Administration (FHA) loan even with a score of 500, but you’ll need to make at least 10% of the down payment. Although, independent FHA lenders set their own requirements.
Besides looking at your credit score, lenders also consider the following details while evaluating your loan application.
- Debt-to-income ratio
- Loan-to-value ratio
- Down payment
What types of mortgages can you get with bad credit?
Fortunately, some mortgages have lower credit score requirements than others. Government-backed loans like U.S. Department of Agriculture loans and U.S. Department of Veterans Affairs loans may offer flexible credit requirements like FHA loans.
The FHA isn’t a mortgage lender, but it offers insurance on loans from the lenders it has approved.
FHA loans are designed for borrowers with low credit scores and down payments as they may not be eligible for a conventional loan.
Conventional loans are not a part of any government lending program. So they are offered by traditional mortgage providers like banks, credit unions, private lenders, and non-bank lenders that typically operate online.
Although mortgage lenders provide these loans to borrowers, the Department of Veterans Affairs is the one to insure them. The VA doesn’t establish any minimum credit score requirements or necessitates making a down payment.
The U.S. Department of Agriculture sponsors two different types of home purchasing loan programs specifically designed for low to moderate-income homebuyers looking to purchase a home in rural or suburban areas around the country.
The first program is a USDA-backed loan offered by private mortgage lenders, and the other program is where you can get a direct loan funded by the USDA.
There’s no mandate for down payment under both programs, but a borrower must meet their income requirements and property criteria.
|Loan Type||Designed For||Minimum |
Credit Score Requirement
|FHA||Borrowers with low credit scores and a down payment of less than 20%||580 at a 3.5% down payment and 500 at a 10% down payment||Steady income, proof of employment, and a debt-to-income ratio of less than 43%|
|Conventional||All borrowers||620 (a few lenders may demand a higher score)||–|
|VA||Active duty and retired military personnel, veterans, and surviving spouses of eligible service members||Between 580 and 620||Service time and eligibility criteria|
|USDA||Low to moderate-income homebuyers looking to purchase a home in rural or suburban areas||640 (for a score as low as 600, you’ll need to undergo a manual underwriting process requiring a detailed look at your finances)||–|
Three simple steps to improve your credit score
1. Pay off debt.
One of the best ways to improve your chances of getting a mortgage is to reduce your debt. If you have any dues on your credit card, pay them off if possible or at least lower the outstanding balance. Also, avoid making any new charges on the account.
Your payment history is an important part of your credit score. If you have any loans currently, make sure to pay them on time, without missing payment even once. Demonstrating that you can pay your loans on time shows lenders that you can pay back responsibly.
2. Don’t close an existing credit card or get a new one.
Closing an existing credit card can impact your score in several ways.
First off, it can reduce your credit limit and affect your utilization ratio, one of the important factors making up your credit score. (Ideal credit utilization ratio should be less than 30%).
The second effect of closing an existing credit card is that it can reduce the average age of your credit accounts, which is more relevant if it’s an old account. The longer the credit history, the higher it boosts your score.
Third, opening a new credit account can make it more difficult for you to get approved for a mortgage as the lender performs a hard check on your credit when you apply for a new credit card or loan, lowering your score by a few points.
3. Consider other alternatives.
Some credit reporting agencies will consider alternative information, such as your utility payments, and include them in your credit report. If you’ve never missed a payment, this can boost your credit score.
You can also think of consolidating your debts into one single loan, which can help reduce your monthly payments and save on interest.
If you’ve rented a house and been regular with your payments, you can get that information added to your credit report.
There’s no need to put off buying a home even if your credit score is not the best. According to some experts, now is the time to go with what you’ve got, even if you need to pay more for a mortgage. You race against time in today’s market as home prices and interest rates continuously increase.
You could wait for a year or two to improve your score to get a better interest rate, but rising housing prices may negate any credit score gains you make.
More than anything else, you need to make sure you’re mentally prepared to take on the largest loan you’ve ever had.
If you’re still thinking, how do I fix my credit, consider taking the help of a credit repair company like Cool Credit that will evaluate your credit report, identify any errors, and dispute them with the credit bureaus to have them removed!