Many people think a low credit score will effectively put
the kibosh on their dream of homeownership.
While it is true that a good FICO rating is going to make
things easier toward obtaining favorable terms on a mortgage, a subprime credit
score does not effectively lock you out of your potential home.
In fact, since 2013, lenders have increasingly been
approving mortgages for borrowers with credit scores under 700.
While a high credit score indicates to the lender that you
are more likely to repay the loan, they also look at other risk factors such as
debt-to-income ratio and loan-to-value ratio.
WHAT IS A BAD SCORE?
But what exactly constitutes a "low" credit score?
The number varies from lender to lender and is ever-changing due to market
fluctuations but, generally speaking, anything over 661 is seen as good, with
scores over 720 deemed excellent.
These types of FICO scores qualify for the best possible
rates.
However, scores that fall below 661 are considered “low.”
That does not mean that a 660 FICO score equals bad credit.
In fact, scores down to 600 might be considered “fair,”
though anything less is classified as “poor”.
But for a home mortgage, a low credit score entails higher
rates.
Luckily, several insurers weigh other elements besides
credit score when considering your mortgage application.
Furthermore, government-backed programs offer alternatives
for buyers with high credit risk.
Traditional mortgages from the FHA, VA, and USDA accept
lower FICO scores and provide reasonable terms, such as low or no down
payments.
For example, a 580 or higher FICO score allows borrowers to
qualify for the FHA’s 3.5% down payment program.
Lower scores might still be eligible for a loan, but with a
higher down payment requisite.
POSSIBLE LOAN OPTIONS
Other options include home improvement loans (where the
mortgage contains additional funds for home renovations) and refinancing, such
as the FHA 203(k) Rehab Loan, FHA Streamline refinance, the Fanny Mae HomeStyle
Renovation Mortgage, and the Home Affordable Refinance Program (HARP).
It might be beneficial to peruse through all available HUD
programs and see if you qualify for any of them; these government-sponsored
programs exist specifically to help buyers with poor or no credit history.
Nonetheless, it is also recommended that potential buyers
talk to as many lenders as possible.
Understanding each insurer’s requirements and researching
their offerings is a necessary step in the exploratory process.
You should also know your credit limitations so that you can
seek out a loan that you can afford and avoid overreaching.
Additionally, it's important to be honest about your credit
history.
Lenders are more apt to consider a low credit score if it’s
due to some unforeseen or unavoidable circumstance like loss of job, accident,
or illness, rather than flat out irresponsibility.
WHAT YOU SHOULD DO
Even if you do fall into the “low” category, there are steps
you can take to compensate for it so that companies look past the poor credit
history and focus on more favorable components of your financial profile.
For example, if you're a renter, providing proof of on-time
payments for at least 12 months could work significantly in your favor, more so
if the rent payments are comparable to what you would pay with the mortgage.
Having a high income or a stable employment history (2 to 3
years working in the same industry) lets lenders know the borrower has job security
and a steady revenue stream.
A 43% or lower debt-to-income ratio (or, better yet, having
no accumulated debt at all) can make you more attractive to lending
institutions since more of your income is available to repay the mortgage
amount.
If you have accumulated debt, be it loans or credit cards,
it is beneficial to pay off some of it before attempting to secure a mortgage.
Cash is another compelling factor for lenders.
Making a significant down payment, something in the way of
10% or more, not only brings rates down but also builds equity faster.
The government-backed loans previously mentioned even allow
gifted cash amounts to be applied as down payments.
Liquid assets that can be converted to cash can further
influence certain lenders to look the other way regarding your credit score.
Shorter-termed loans for smaller amounts can also help score
better terms since the insurer’s risk is minimized.
With these considerations, we found the following four
companies to be good bets for those with poor credit who are seeking mortgages.
