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What Are Home Loans Possible With Low Credit Scores?

There are still options. Learn how credit scores affect your borrowing power and what home loans are available for those with low credit score.

Perhaps you have saved enough money for a down payment and planned to pay the mortgage. Your credit score is not perfect.

What Does Your Credit Score Imply?

Your credit score is a number that measures your creditworthiness. Your credit score is used by banks, credit unions, and other financial institutions to assess your risk as a borrower. Credit bureaus use formulas to calculate credit scores that take into account factors such as:

  • What number of credit and loan accounts do you have? And what are the balances?
  • The age of your credit card and loan accounts
  • You can pay your bills on time if you do.
  • How much debt do you have?
  • How many times you have requested credit more recently

Although it is easy to believe that only one credit score applies to you, this is not the truth. Many organizations have their credit scoring models. While lenders may use one or more models to evaluate your creditworthiness and score you, mortgage lenders often use the Fair Isaac Corporation (FICO).

Lenders consider credit scores when determining which home loans borrowers are eligible for. Borrowers with high credit scores are more likely to be approved for home loans with lower interest rates and better terms.

Low Credit Score Borrowers Can Get Home Loans

A Conventional loan may not be available to you if you have lower credit scores. You might want to look into these mortgage options instead.

  • FHA loans

Federal Housing Administration (FHA) offers home loans that the government guarantees with more flexible terms. FHA loans (Opens Overlay) typically require a credit score of 580 or more. You don’t need to make a huge down payment. FHA loans require a minimum down payment of 3.5% of the purchase price. Lenders may offer FHA loans with scores of at least 500. If you don’t have a credit score but have established a non-traditional credit record, an FHA loan with a 10% down payment is possible.

FHA loans come with a mortgage insurance premium (MIP) to offset the potential risk borrowers with poor credit scores may pose. The upfront MIP of 1.75% is the loan amount. The annual MIP of 0.45% to 1.05% is the average remaining mortgage balance. This is typically included in your monthly mortgage payment. For current information, contact your Home Lending Advisor.

  • VA Loans : Low Credit Score

You may be eligible for a U.S. Department of Veterans Affairs loan if you are an active, retired, or detached military member, as well as the National Guard and Reserves. Opens Overlay VA loans don’t usually require a downpayment. To qualify, you will typically need to have a fair credit score.

VA loans have additional fees, just like FHA loans. The majority of borrowers will have to pay an annual funding fee (Opens Overlay), between 1.4% and 3.6%. For current information, check with your HLA. Borrowers with higher down payments who apply for their first VA loan will typically pay the lowest funding fees.

  • Grant programs

Numerous state, county, and municipal government agencies offer vouchers, grants, and other programs to help borrowers with low credit scores. Look for housing assistance programs and mortgage grants in your locality.

What is considered a high credit score?

According to the Consumer Financial Protection Bureau (PDF), Lenders consider FICO credit scores between 670 to 739 excellent. FICO credit scores between 740-799 are generally deemed very high, while over 800 are exceptional.

What Is Considered Low Credit?

Lenders consider FICO credit scores between 580-669 fair. Credit scores below 580 can be deemed low-quality.

What Other Factors Are Lenders Looking at?

While credit scores are an important component of loan applications, they don’t consider them the only factor. They also consider:

  • Income and debts: Conventional lenders usually require a DTI below 43%. Lenders divide your mortgage payment and recurring monthly bills by your monthly pretax income to determine your DTI.
  • A down payment is a requirement. The higher your down payment, lenders will be more likely to consider your application. You can avoid private mortgage insurance by making a minimum 20% down payment. This percentage can be calculated by subtracting your down payment from the appraised or purchase price.
  • Assets: Lenders may require that you have assets in reserve following the closing of your loan to continue making your monthly mortgage payment. Assets include stocks, bonds, and bank accounts.
  • Work history: Lenders prefer borrowers who have a track record of steady employment. You may need to be employed in your current position or field for at least two consecutive years.

How To Apply For a Loan On a Home With Low Credit Scores

These are the factors to consider if you apply for a loan home with a lower credit rating.

  • This won’t permanently damage your credit score. An application for a home loan is a hard credit pull that will appear on your credit report. This credit pull could affect your credit score.
  • Lock in a low rate of interest. It is a smart move to act sooner than you think if you want to purchase a house at low-interest rates. Applying later could result in higher monthly payments and interest rates.
  • A large down payment may be required. Lenders may ask for a sizeable down payment to offset your credit score.
  • You may need to prove income or have assets. Your lender might require significant investments or a lower DTI to make up for your low credit score.
  • It is possible to end up spending more. You may end up paying more if you take out low-credit loans that require large upfront or annual payments. This can lead to higher house prices.

How to Improve Credit Scores

Your credit score doesn’t need to be below right now. These tips can help you improve your credit score.

  • Pay your bills and loans on time. Pay every bill on time. Your credit score will improve if you have a good payment record.
  • Reduce your debt. Paying down significant debt on your credit reports, such as credit card balances and other debt, can help you improve it. The snowball method involves paying off the smallest balances first. You can also try the avalanche approach, which requires you to pay off high-interest debts first.
  • Older accounts should be kept open. Pay off your credit card debt. Do not close your account. You can improve your credit score by keeping older accounts open.
  • Stop applying for credit. Multiple hard credit pulls can lower your credit score. Avoid using for credit if every point is important.
  • Correct credit report errors. Your credit report can include mistakes that could lower your score. Check your credit score free of charge and review your report to find any errors. To dispute an error, contact the credit bureaus directly.

A low credit score doesn’t necessarily mean that you won’t be able to get a mortgage. Talk to a Home Lending Advisor and find out what home loans are available to you. Together, we will decide whether to apply now for a mortgage or wait until you have a better credit score.

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