Are you thinking about buying a home? If so, there’s a good chance that you’ve heard the term “credit score” mentioned a time or two – or ten. While getting a mortgage with great credit might not be an issue at all, the idea of completing a mortgage application with subpar credit might have you breaking out in a cold sweat.
Is all hope lost if your credit score is less than 650 and you’re applying for a mortgage? Not necessarily.
This post will tell you everything you need to know to apply for a mortgage with less than ideal credit. Plus, we’ll give you some tips to help you boost your credit, no matter what your financial picture currently looks like.
How Do Credit Scores Work?
Before we dive into what kind of credit you need to get a mortgage, let’s first tackle the nitty-gritty of what credit scores actually are.
Simply put, credit scores are numbers that lenders use to determine your creditworthiness as a borrower. These can range from 300 to 850.
A credit score above 740 is considered excellent credit and will land you the most favorable interest rates and terms. If you have a score between 700 and 739, that’s good credit, 630 to 699 is fair credit, and 629 and below is poor credit.
Your credit score impacts the type of mortgage and mortgage rates you qualify for. Your rates and required down payments will increase as your credit score goes down, and vice versa.
If all that sounds overwhelming, there is some good news. Credit scores aren’t the only factors that lenders consider when looking at your mortgage application.
What Other Factors Affect Your Mortgage?
The credit score is undeniably one of the most important pieces of your application when you apply for a mortgage. However, it’s not the only one.
If you’re able to “wow” lenders with other aspects of your financial background and application, they may still be able to offer you favorable rates despite having subpar credit.
These other factors include:
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- Your loan to value ratio
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- Debt to income ratio
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- Income and other assets (such as your savings and employment history)
If you have poor credit but minimal debt relative to your income, that will make your application more favorable, as will a high income or lengthy employment history.
Mortgage Options for Applicants With Bad Credit
There are a few different types of mortgages you can apply for, and each has its own unique requirements regarding the credit score. Here are a few options to consider, especially if you have poor credit.
Conventional Loans
For conventional loans – the ones you’ll walk into a bank or credit union to get – you’ll usually need a credit score of at least 620. However, there are some circumstances in which this is waived.
For instance, if you have a high income compared to your loan amount – or if you’re able to put down a sizable down payment – you might be eligible for a conventional loan even with a credit score lower than 620.
VA Loans
VA loans are backed by the US Department of Veteran Affairs. As the name implies, these loans are available to veterans and active-duty members of the armed forces. With a VA loan, you can buy a home with a $0 down payment or even a less than ideal credit score, as long as you meet other stipulated criteria.
VA loan lenders ask most borrowers to pay one-time funding fees, though, so keep this in mind as part of your planning process.
FHA Loans
FHA loans are ideal for borrowers with credit scores from 500-600. These loans are backed by the Federal Housing Administration and have relatively low qualification requirements – making them exceptionally attractive to first-time or low-income borrowers. One thing to keep in mind – these loans are only applicable to the purchase of a primary residence.
USDA Loans
Not every property will qualify for a USDA loan – these loans, offered by the U.S. Department of Agriculture, are for individuals who wish to buy homes in rural areas. They allow you to purchase a home with a $0 down payment.
Most USDA lenders require borrowers to have a credit score of at least 640. You may also have to meet other income requirements specific to the USDA.
How Do I Improve My Credit Score?
Even if you’re able to get a mortgage with a lower credit score, remember – the higher your credit score is, the better loan terms you’ll get. Make boosting your credit score a goal so that you can qualify for more attractive rates.
Your first step? Make sure everything looks as it should. Check your credit report for errors – namely, payments that weren’t documented or accounts you don’t actually own. These errors can seriously impact your credit score and are usually easy to resolve.
Here are a few more steps you should take:
- Pay off all outstanding debt: Pay off all outstanding debt, if you can. Even getting rid of a few low-balance credit cards can have a major impact as it will boost your credit utilization ratio.
- Pay bills on time: This sounds obvious, but it can be challenging for some borrowers! Make sure you pay all of your bills on time. This will improve your track record and boost your credit score.
- Avoid hard credit inquiries: Hard credit inquiries negatively affect your credit score, so avoid transactions that call for it (like applying for a new credit card) while you’re trying to improve your credit score.
- Avoid applying for too much credit: Every time you apply for credit, it affects your credit score in two ways. It warrants a hard credit pull, which again, can be harmful to your credit score, and it also reduces your average account age – another major factor in your overall credit score.
- Increase your available credit: Request a credit limit increase or pay down your balances. This will increase the amount of available credit you have, making you more attractive to lenders.
- Erase collections by paying for deletions: If you have any collections listed on your credit report, it indicates that you owe money and have not yet attempted to pay it back. Pay off the debt and request that the collection be deleted. It will erase the records of you receiving or paying back the collection, boosting your credit score.
Have you tried all of these steps and still aren’t sure where to turn as you work to rebuild your credit? Meet with a credit counselor or mortgage broker to get more information on how you can improve your credit score. Every borrower is a bit different, so getting personalized advice can help.
The Bottom Line: You Don’t Need Great Credit to Get a Mortgage
Having a great credit score can definitely help when you’re trying to get a mortgage – but it isn’t the end-all, be-all. You can still get a mortgage with a low credit score, though again, the rates will be on the higher side and you may be required to make a larger down payment.
Try to get your credit score as high as you can by following the tips above. You can always try applying with a coborrower who has a better credit score, too. Their assets, income, and credit score will be considered alongside yours – and while the lender will still look at the lowest of the two credit scores when deciding what interest rate to charge, it may help your chances of getting approved.
Whether you have great credit or not, there are things you can do to improve your chances of getting a mortgage. Follow these tips, and you’ll be on your way to owning the home of your dreams.
