Get a Mortgage With a Low Credit Score: What You Need to Know
Even though your credit history is less than desirable, it doesn’t mean your dreams of owning your own home can’t become a reality. Learn how to get a mortgage with a low credit score and envision yourself shaking hands to seal the deal.
What’s Credit?
A credit score is primarily based on a credit report, information typically sourced from credit bureaus.
What does your credit report include?
- The number of credit card accounts you have, their borrowing limits and current outstanding balances
- The amounts of any loans you’ve taken out and how much of them you’ve paid back
- Whether your monthly payments for your accounts were made on time, late or missed altogether
- More severe financial setbacks such as mortgage foreclosures, car repossessions and bankruptcies
What’s Considered Bad Credit?
Based on the FICO ® Score range of 300 to 850, a credit score below 669 is considered to be either fair or bad.
When you have bad credit, it can be much harder to secure a loan for a house. However, it’s not impossible, and the good news is there are several options available to getting you closer to that handshake. Get educated and learn how to buy a house with bad credit.
Can There be Mistakes in Your Credit History?
It’s not uncommon for there to be mistakes on your credit report. In fact, one in five people has an error on at least one of their three credit reports, as reported by the Federal Trade Commission.
Take a look at your credit reports and dispute charges.
- You may discover information about a credit card you never had on one or all three of your credit reports
- You may find a misspelling of your name on the list of alternative names you have gone by
- You may see late payment information for a credit line that was never paid late
- You may see a line of credit still listed as open when you have closed it
It’s recommended to speak to a credit expert to help you navigate through your report and the credit bureaus, when you believe there are errors. Fixing any issues the credit bureaus are reporting can make a huge difference when applying for a mortgage.
What Are Steps for Increasing Your Credit Score?
- The first step is understanding the factors that go into your credit score
- The second step is hard work and patience
If you pay down your debts, regularly pay your bills on time, and keep the same line of credit open for several years, you’ll see your score go up.
What Are Alternative Options to Traditional Loans?
The reality is when you’re known to the financial world as having bad credit, you don’t have the positive payment history for lenders to trust that you’ll pay them back. Therefore, the worse your credit score, the higher your finance charges will be.
You can get a mortgage with a low credit score and there are several alternative lending companies out there who can make it happen.There are low credit score mortgage lenders and several government-sponsored agencies that can help you secure a home loan when traditional options are not an option due to bad credit.
FHA Loans
FHA stands for the Federal Housing Administration. The minimum credit score to quality for this type of loan is 500. If you have a limited amount of money to use as a down payment, an FHA loan will work well for you, since you may only be responsible for a 10% down payment.
VA Loans
The U.S. Department of Veteran Affairs offers loans for active or retired military who may be going through financial struggles. According to their website, 90% of VA-backed loans are made with no down payment.
USDA Loans
USDA loans were created by the United States Department of Agriculture (USDA) to improve the quality of life in American rural communities. These loans don’t require a down payment and have low, fixed interest rates, so very beneficial for someone with low credit.
Fannie Mae HomeReady Program
This loan program offers financing with as low as 3% down for borrowers with low credit scores due to a limited credit history.
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These programs understand people experience financial struggles and make choices that can lead them down a path of debt. Talk to a financial expert to understand your options and discover the best path to get you there.
A great resource to keep handy is the Affordability Calculator, which takes your annual income, your ideal down payment you can afford, any monthly debts to consider, your credit score and your zip code and provides you with the cost of a home you can afford.
It also gives you your DTI, which is your Debt-To-Income, your “minimum monthly debt divided by your gross monthly income. The lower your DTI, the more you can borrow and the more options you’ll have.”
- Understand your credit score
- Work on increasing your credit score
- Discover any mistakes on your credit report
- Start getting yourself out of credit card debt
- Take advantage of government programs to get a mortgage with a low credit score
Just because you have bad credit, doesn’t mean you’re a bad person. Now that you know how to get a mortgage with a low credit score, you’re on your way to getting the keys to your dream home.
