If you’ve been reading about loans, you know that credit score is one of the main things that lenders consider. Thus, a bad credit score is automatically a bad sign for your mortgage application. Luckily, there are many ways to surpass the credit score hurdle and get a loan to buy a home.
First, a word about credit scores
Credit scores and mortgage loans, needless to say, are pretty much tied together. Your credit score affects what a lender offers you, particularly the interest rate. It plays a huge role in how the lender assesses your overall creditworthiness. Whether a credit score is “good” or “bad” depends on the lender’s guidelines. Credit scores range from 300 to 850, with an 850 credit score being the best possible credit score and 500 or lower being a very poor credit score.
So, what are your options?
One: Apply for an FHA mortgage loan. The Federal Housing Administration insures loans, guaranteeing that lenders get paid if a borrower defaults on their loan. This encourages lenders to make loans to more risky borrowers. Per FHA loan guidelines, a credit score affects the downpayment size; thus, a borrower with a score of 580 or higher will be eligible for the minimum downpayment of 3.5%, while a borrower with a credit score between 500 and 579 will be required to make a downpayment of 10%.
Two: As one site puts it, subprime mortgages are back since the collapse of subprime lending in 2008. A subprime mortgage is often referred to as a bad credit mortgage because it caters to home buyers with low credit. To make up for the risk, lenders impose higher interest rates and the loan is often structured as an ARM (adjustable rate mortgage). In some instances, borrowers would take out a second mortgage to get a lower cost first mortgage.
Three: HomeReady loans offered by Fannie Mae can accept borrowers with low or no credit score, which may be underwritten manually or through a Desktop Underwriter (DU). A borrower is deemed with nontraditional credit if he/she has no credit score because of a lack of history with the credit bureaus. For borrowers that don’t meet the minimum credit score, lenders follow the options outlined by Fannie Mae.
Yes, there’s hope for that loan
A good repayment history for the last 12 months, proof of stable income, and a detailed explanation of why your credit score is low are some things you can do to increase your chances of getting your loan approved. Let the lenders know that you are still credit worthy for a loan and that you are worth the lending risk.
Now’s the best time to contact a lender
Don’t let your credit score or your fear of being turned down because of such score stop you from buying a home. Consult a lender to see how you can repair or work on your credit so you can qualify for a mortgage. Click the orange button to get started!
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.