Fear of a loan denial has led some consumers with low credit scores to simply not bother applying for a mortgage. But, while you'll still have to provide proof of your income and assets and an explanation of your low credit score, it is possible to get a mortgage with a low credit score from some lenders.
"Your credit score is a piece in the qualification puzzle, but it's not the whole puzzle," says Josh Moffitt, president of Silverton Mortgage Specialists in Atlanta.
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'Fair' to 'poor' is considered a low credit score
There aren't any hard lines between a "good" and "bad" credit score. The scores break down like this:
A number, roughly between 300 and 850, that summarizes a consumer's creditworthiness.
The higher the score, the more able and willing a consumer is to repay a loan, lenders believe. The best mortgage rates and terms go to borrowers with credit scores of 740 and higher. Generally, a "low" credit score is in the "fair" to "poor" ranges below.
740 and higher = excellent
661 to 739 = good
601 to 660 = fair
501 to 600 = poor
500 or lower = bad
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Borrowers' credit scores are falling
Lenders in 2014 were approving more loans with lower credit scores. According to mortgage software provider Ellie Mae, 33 percent of closed loans in spring 2014 were for borrowers with a credit score below 700, compared with 27 percent a year earlier.
Borrowers with low credit scores often get FHA loans
Lenders are typically more lenient with credit qualifications for borrowers who opt for government-insured Federal Housing Administration loans.
Carrington Mortgage in Santa Ana, California, accepts applications from borrowers with a credit score as low as 550 for FHA loans, with minimum down payments of 10 percent.
Demand is there for low-score borrowers
"There's a huge segment of underserved borrowers today," says Ray Brousseau, executive vice president of the mortgage lending division of Carrington Mortgage Services. "In 2005, 1 out of every 7 loans were approved for borrowers who had a credit score under 630. By 2013, 1 out of every 500 borrowers had a credit score that low."
3 things about getting a mortgage with a low credit score
- Lenders are becoming less strict about credit scores.
- Some lenders see a difference between irresponsible applicants and those who lost jobs.
- Proving a year of on-time rent payments could be helpful.
Brousseau says that Carrington has been able to offer loans to borrowers with low FICO scores because employees have experience in managing subprime loans.
"We invested in people with expertise in manually underwriting loans and making common-sense decisions about borrowers, and they're joined at the hip with servicers who talk directly to borrowers and help them manage their loans," Brousseau says. "Our loans are perfect for the group of people that got caught up in the recession and lost their job or had their hours or pay cut or had to move and take a loss on their home."
Automated and manual underwriting
Two methods that lenders use to approve or deny mortgage applications:
- Fannie Mae and Freddie Mac have software programs (Desktop Underwriter and Loan Prospector) that can automatically approve loans based on the borrower's credit score, income, total debts and other criteria. That is automated underwriting.
- In other cases, the lender may approve loans based on the lender's judgment. That is manual underwriting.
Qualifying for a low-credit mortgage
Moffitt explains that lenders run loan applications through automated underwriting systems from Fannie Mae or Freddie Mac. The applications must meet the standards established by their investors.