How to get a mortgage with poor or bad credit
If your credit score is low, you might assume that getting approved for a mortgage is impossible. However, there are lenders who offer financing to borrowers with poor or bad credit, and your score isn’t set in stone. Instead of trying to buy a house with bad credit right now, you can instead focus your energy on improving your credit. By moving into a better range, you’ll improve your odds of securing a mortgage, and one with a lower interest rate, when you do decide to apply for a home loan.
What is a bad credit score for a mortgage?
There is no credit score threshold that will definitely disqualify you from getting a mortgage, but the lower your score, the harder it will be to find a lender to approve you for a loan. For conventional conforming loans, a 620 credit score is typically the minimum for consideration, while government-backed loans tend to offer more flexibility with lower credit scores (more on that below).
Credit scores generally range from 300 to 850, though some scoring models for auto loans and bank credit cards can stretch from 250 to 900.
One of the most common scoring models is the FICO score. The average FICO score in the U.S. is 716, considered “good” by FICO standards, although there’s no firm cutoff for what constitutes a good score. Many mortgage lender advertisements for the best interest rates assume a credit score of at least 740 or higher.
Here’s how the population breaks down in terms of credit scores, according to FICO:
- 800–850: 23% (Exceptional)
- 750–799: 23% (Very good)
- 700–749: 16% (Good or very good)
- 650–699: 12% (Fair or good)
- 600–649: 9% (Fair)
- 550–599: 7% (Poor or fair)
- 500–549: 5% (Poor)
- 499 and lower: 3% (Poor)
Keep in mind that your score can vary between the three credit reporting bureaus, Equifax, Experian and TransUnion. Some lenders look at the middle credit score of the three when considering you for a mortgage.
How much extra will a low credit score cost you?
Mortgage lenders check your credit score when deciding whether to approve your loan application. It doesn’t just impact whether you’re approved, though — it also plays a major role in the interest rate you receive. The best mortgage rates are reserved for the borrowers who present the lowest risk.
The examples below are based on national averages for a 30-year fixed loan in the amount of $282,240 — 80 percent of the national median home price, according to the National Association of Realtors, reflecting a 20 percent down payment.
|Source: myFICO loan savings calculator|
|FICO score||APR||Monthly payment||Total interest paid|
While it might not seem like there is a big gap between a 2.8 percent APR and a 4.3 percent APR, there is a dramatic difference — more than $90,000 — in interest over the life of the loan. Although this example doesn’t go below 620, the data is clear: Credit scores lower than that result in even higher financing costs.
How to get a mortgage with bad credit
While getting a mortgage for a home or refinancing with less-than-perfect credit can cost more, it might still be more appealing than continuing to pay rent. Here are tips to help you get a mortgage with bad credit:
- Shop around – Every mortgage lender is different, and some are able to offer lower rates than others. Research shows that getting multiple rate quotes can save you thousands over a 30-year mortgage.
- Think bigger than banks – Banks are not the only mortgage game in town; there are non-bank and online lenders, credit unions and other types of lenders, and they all want your business. Let them compete for it to see where you get the best offer.
- Explore bad credit home loans – If you’re a first-time homebuyer or otherwise qualify for low-income loan programs, you have options beyond a conventional loan. VA loans and USDA loans have no down payment requirement and no set credit score requirement, so ask your lender whether you’re eligible. The Fannie Mae HomeReady and Freddie Mac Home Possible loan programs are worth exploring, too, along with many first-time homebuyer programs.
- Find a co-signer – If you have bad credit, you might consider asking a family member or friend with better credit to co-sign your mortgage. This can help give your application a boost — but only if the co-signer is able and willing to take on the debt.
- See if you qualify for down payment assistance – If you’re looking to get a mortgage with bad credit, you might be worried about coming up with a down payment, or hoping to boost your down payment to compensate for your credit situation. There are more than 2,500 down payment assistance programs nationwide, so there could be one you qualify for.
- Don’t make any big changes to your finances – A new credit card or big purchase can push down your credit score, so avoid taking on or applying for new debt during the mortgage application process.
- Watch for ‘guaranteed’ approval loans – If you see ads promising “guaranteed” approval for a mortgage regardless of credit, it’s a red flag. Under federal rules, a lender must verify the ability of a borrower to repay a mortgage, so there can’t be a “guarantee” unless that happens. On these kinds of offers, you might even get that guaranteed approval, but it’ll come with excessive or inflated costs.
Home loans for borrowers with bad credit
- Conventional non-conforming loan – Even with bad credit, you might be able to qualify for a conventional loan that’s “non-conforming,” or falls outside of Fannie Mae and Freddie Mac requirements for factors like credit score. This can be an option if you’ve declared bankruptcy or are otherwise credit-challenged.
- FHA loan – FHA loans are insured by the Federal Housing Administration and allow lenders to accept a credit score as low as 580 with a 3.5 percent down payment, or as low as 500 with a 10 percent down payment. The drawback here is that you’ll pay mortgage insurance.
- VA loan – If you’re a member of the military, a veteran or married to someone who has served in the armed forces, one of your benefits is the VA loan program backed by the U.S. Department of Veterans Affairs. You don’t have to come up with a down payment for this type of loan, and there are no minimum credit score requirements, although lenders do have their own credit standards.
- USDA loan – If you meet certain qualifications — earn less than a certain amount each year and want to buy a property in a certain area — the U.S. Department of Agriculture-backed lending program can help you become a homeowner with subpar credit.
7 tips to boost your chances of mortgage approval
Increasing your odds of being approved for a mortgage starts with increasing your credit score. Begin well in advance of house-hunting or seeking a mortgage preapproval.
1. Check your credit report for free
Obtain your credit reports for free at AnnualCreditReport.com and review them carefully. More than one-third of participants in recent Consumer Reports research found errors on their reports, and these mistakes can be costly. Depending on the error, you might have an incorrect open loan attached to your name, an incorrectly-filed late payment or some other issue that can drag down your credit score.
If you see a mistake or outdated item — generally seven years, but sometimes longer for bankruptcies, liens and judgments — contact Equifax, Experian or TransUnion. Each of the credit bureaus has a process for correcting errors and out-of-date information.
2. Create a budget — and stick to it
To improve your credit standing, you have to know what you’re spending to avoid racking up debt. The best way to do this is with a budget that tracks income and expenses. Look for opportunities for small savings — they add up.
3. Make all payments on-time and in full
This is the gold standard practice for good credit. Develop the habit of making bill payments on time so you avoid late fees and other needless costs, as well as blemishes on your credit report.
Although you’re looking to get a mortgage, you have to earmark money for emergencies, too. Set aside cash every week or pay period, and aim for at least $400 in savings to start.
You need to have savings to buy a home, as well, not only for a down payment but also for closing costs, so getting into the habit of saving regularly can help you now and when you’re ready to house-hunt. When you apply for a mortgage, the lender is going to look at your bank statements to verify that you aren’t draining your account to zero in order to purchase a home.
5. Be careful about closing credit cards
While you don’t want to open any new credit cards in the lead-up to your applying for a mortgage, you don’t want to close any, either. That’s because closing a card means your available credit has dropped, reducing your borrowing power. More importantly, it will impact your credit-utilization ratio, the measure of how much credit you have used relative to your total credit availability.
6. Take advantage of credit-boosting programs
The UltraFICO and Experian Boost programs track the movement of cash in your bank account, and in many cases, your score can go up based on this data.
For example, 60 percent of those who have completed the Experian Boost process experienced credit score increases. The average increase was 12 points. The change was even bigger for those who fall into the poor or bad credit categories: 87 percent of those who started with a score lower than 579 saw an average increase of 22 points.
While you’re working to boost your score, keep an eye on it, too. Many banks also offer credit monitoring for their customers, which can be a good idea to utilize in tandem. You’ll be able to get a sense of when and why your score goes up or down.
7. Consider a rapid rescore
Credit report changes can take time to go through the system. That means improved scores might not show up in time for a mortgage application. In this case, you might want to get a so-called rapid rescore through your lender.
A rapid rescore allows a lender to submit proof to a credit agency that an applicant has made recent changes or updates to their account that are not yet reflected on their credit report, according to Experian. Borrowers cannot request their own rapid rescore, as the service is only offered to lenders. A rapid rescore isn’t free, either, but the fee for adjusting your credit during your mortgage application could be more than offset by your lower interest rate.
Should you get a mortgage or increase your credit score first?
Should you take out a mortgage now, or increase your credit score before you apply for financing? The best answer is to plan ahead. Credit scores continually fluctuate, so it’s worth taking steps to improve your score before embarking on a home purchase.
A small increase can make a big difference. For example, even if you only raise your credit score to 665 or so from 650, you might be able to cut your mortgage costs significantly. Over the course of a 30-year mortgage, for instance, your monthly payment will be lower, and you would save more than $24,000, based on the above example from myFICO.
With additional reporting by David McMillin
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