Real Estate

How to Get a Mortgage With Poor Credit Score

How to Get a Mortgage With Poor Credit Score

If you have the question ‘is it possible to secure a mortgage with a poor credit score’’ in your mind, then you can rest easy because there is a high probability that certain credit facilities and borrowers would be willing to grant you a loan. Especially if you have a large upfront payment, large cash reserves, and a low debt-to-income ratio.

According to FICO, about 15% of American consumers have credit scores ranging from 500 to 599 on an 850-point scale, which is considered low to fair credit. Another 10% have a credit score of 600 to 649, which is considered fair. If your credit score isn’t ideal, you’re not alone, and a competent lender can help you secure a mortgage or explain how to improve your chances in the future.

What low or poor credit signifies

A poor credit score for a mortgage prevents you from obtaining a loan, allows you to obtain a loan at a higher interest rate, or necessitates a greater down payment to qualify for a loan.

The definition of “bad” varies according to the loan type, ranging from conventional, FHA, VA, or USDA. Even if you have a low credit score, a regular salary, a small amount of debt compared to your income, and a sizable down payment might help you secure a mortgage. However, if your score is less than 500, you will most likely be turned down. Also, a recent foreclosure or bankruptcy can affect your credit score and prevent you from acquiring a loan for at least a year, if not more.

What is the credit score requirement for a mortgage?

The credit score required to obtain a mortgage varies depending on the type of loan. It also varies depending on the lender with whom you’re working. Some lenders are more ready to engage with applicants who have a poor credit score than others.

Credit score requirements for traditional mortgages

Although conventional mortgages have the strongest credit score criteria, they are nevertheless more forgiving than you might assume. And for customers making the minimum down payment of 3%, Freddie Mac and Fannie Mae, the two massive organizations that assist make conventional mortgages generally available, apply rigorous credit score criteria. The minimal credit score for Freddie Mac is 660, whereas Fannie Mae’s is 620. Freddie Mac will also accept a credit score as low as 620, albeit with a 25% down payment.

If a borrower’s credit score is below the minimum due to a lack of credit history, mortgage companies might make an exemption. That, however, is not the same as having a poor credit history. It’s only a viable alternative if the items that do surface in that restricted history aren’t negative, and the applicant can demonstrate their credit quality with verifiable payments that don’t appear on typical credit reports, such as rent or utilities.

Conventional borrowers with credit scores that are just above the credit score limit will typically need a debt-to-income ratio of no more than 36 percent and must be purchasing the home as their primary residence. Lenders may also demand a minimum of two months’ worth of financial reserves.

Getting a mortgage compared with improving your credit score

Here you have the option of working on your credit for many months or even longer. And in the process, if the interest rate rises, you may not be able to meet up the cut-off score, even with your improved credit. On the other hand, if they fall, you’ll be able to save money thanks to your better credit and the market’s cheaper rates.

Steps to follow to obtain a mortgage despite poor credit score

Recognize the possibilities: Consider a VA, USDA, or FHA loan if you don’t qualify for a standard mortgage.

Don’t be easily discouraged: Before you get a yes, you may get a lot of no’s from lenders.

Consider working with a mortgage broker: They might be able to tell you which lenders are the best fit for your needs. Before you apply for a mortgage, work on boosting your credit for a few months.

Paying off high-balance credit cards, making on-time payments, and disputing credit report inaccuracies can all boost your credit score significantly.

Save at least 10% of the purchase price as a down payment. When you have more stake in the game, lenders will consider you to be less risky.

Conclusively, know that some folks will be unable to qualify for a mortgage, because they lack the necessary mitigating conditions, such as a 10% down payment.

Bad credit, on the other hand, does not have to stand in the way of your dream of owning a property. Your credit history is just one aspect of your total financial picture. If you have the income and savings to buy a home, even if you have to seek longer for a lender or pay a higher interest rate, buying may be the best option for you.

The Author

Ajisebutu Doyinsola

Doyinsola Ajisebutu is a journalist and prolific writer who takes a special interest in Finance, Insurance, and the Tech world.