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How to Get a Mortgage With Poor Credit

Published December 1, 2020

5 minute read

Rebecca Henderson

By Rebecca Henderson

If you’re tired of renting, but don’t have great credit, don’t give up hope! Yes, it is actually possible to obtain a home loan with poor credit. Lenders know that not everyone has perfect finances. Life happens! Having a low credit score shouldn’t keep you from owning your dream home. Rest assured, there are options out there that you can take advantage of. Hopefully one of these options will help you qualify for a mortgage of your own.

Below is a quick guide to help you find opportunities for a mortgage, even if you do have a low credit score. Your new property could be just a few applications away.

What Exactly is “Poor Credit”

Experian, one of the three main credit bureaus, designates credit scores of 300 to 579 as “poor” and 580 to 669 as “fair.” The good news is that mortgage lenders typically look at the bigger picture. They just use your credit score as a starting point. They may also consider your debt-to-income ratio, how much money you’re able to put down on a mortgage, and any other entries that appear on your credit report. This includes both positive and negative entries that may affect your ability to obtain a loan. So don’t get discouraged if your credit score isn’t 700 or above.

How Poor Credit Affects Your Mortgage

We mentioned before that those with poor credit should expect higher interest rates. But what else can you expect if you’re applying for a mortgage with a less-than-perfect score?

The name of the game is offsetting your score. That means you’ll want to be able to pony up some extra cash for a hefty down payment. Think of it as a tangible way for a lender to trust you’ll make your payments on-time.

You may also need to provide rent history. This could be a good addition to your mortgage application if you don’t have a lot of credit history. Sometimes low credit scores are just a reflection of credit that has yet to grow. Let’s face it, credit is something you build over time with good financial behavior. A low credit score might be the result of a short credit history, not necessarily from a series terrible financial decisions.

Finally, you may need to find a cosigner. This is simply another way to let the lender know that you’re serious, as the cosigner backs you up. However, they will be responsible for the payments if you can’t make them (and their credit report will be affected too). Choose your cosigner wisely.

Credit Crossroads: Buy Now or Raise and Save

Should you try your luck at borrowing with your current credit score? Or spend some time — ideally, a year or two — upping that score for a chance at better rates? It’s a tricky question, with multiple answers.

Sometimes waiting and increasing your score can increase your savings. But are you willing to put off accepting those house keys and calling a space your own? The ultimate answer to this question lies in what your long-term goals are.

Another consideration lies in applying for a mortgage as a couple. According to the Mortgage Calculator, “joint borrowers applying for a mortgage together may pay a higher interest rate than they would individually.” This can happen when one partner has a significantly lower score than the other. Couples might be better off using the higher credit score to apply for the mortgage in order to qualify for a lower interest rate.

Ways to Get a Mortgage with Poor Credit

There are a few routes you can take to obtain a mortgage with a poor credit score. Research each option further if you feel it might be a good choice for your situation.

FHA Loans

One of the most popular ways to obtain a mortgage with a less-than-perfect credit score is the Federal Housing Administration (FHA) loan. According to Forbes, “FHA loans have the second-loosest credit score requirements after VA loans and are quicker than conventional loans to offer borrowers a second chance after a bankruptcy or foreclosure.”

Typically recommended for those with scores between 500 and 620, there are two tiers regarding down payment requirements. Those applying who have a credit score of 500-579 should budget for 10% down, while a score above 580 brings that figure down to 3.5%. Also, “you will have a difficult time getting approved if your debt-to-income ratio exceeds 45%,” says Debt.org. So consider your financial state before you apply.

VA Loans

Only “eligible military service members, veterans and surviving spouses” can qualify for a VA loan. However, they do boast the “most generous credit score requirements.” That’s because there’s no minimum credit score at all. However, Summit Mortgage reminds that “there are fees associated with a VA Loan that you will not find with other loan programs, but ultimately a VA loan will be your most affordable option.” Check with your local VA office for more details.

USDA Loans

Despite what you may think, you don’t need to be a farmer or work in the agricultural industry to apply for a USDA loan. Rather, it applies to properties within a rural area. Or more specifically, “an area with a population of less than 35,000.” The lowest credit score you’ll need to qualify is 640, but you often won’t be required to make any down payment at all. USDA loans are a great way to afford and own a property in the country.

State and Local Programs

There are also a number of state and local programs you could — and should — take advantage of. First-time homebuyers enjoy eligibility for down payment assistance in many cases. Grant programs exist as well. Finally, Habitat for Humanity and the Neighborhood Assistance Corporation of America (NACA) are both invaluable allies.

Navigating the Mortgage Market

If you want to try your luck in the mortgage market, here are a few things you’ll want to keep in mind. Since you are a potentially higher risk for lenders, it will pay off if you take the time to read the fine print carefully.

Make a House Your New Home

Paying a mortgage might not be the most fun you’ve had spending large amounts of money, but coming home to a place all your own tends to offset this responsibility. We hope this article has given you hope. Finding a way to get into a house could be easier than you first thought. Do your research, make smart financial decisions, and sooner or later, you’ll be surprised how much your hard work has paid off. Happy house hunting!

Couple Shocked by Finance Statement

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Rebecca Henderson

Freelance Writer

Rebecca Henderson has a Master's in German and a Bachelor's in Creative Writing. She alternates her time between writing and working on a variety of motorized projects. Most recently, she and her boyfriend have been building a custom drift trike. Rebecca believes that language, love, and a life worth living are only the first ingredients to happiness.

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