Looking for a bad credit mortgage loan? If your credit is not up to par, yes, you can still get a mortgage with hoop jumping. Believe it or not you may even be able to seal the deal even with credit score sub 620. Here’s what to expect…
FHA- that’s right, the only program out there that will do a mortgage for an applicant with a credit score sub 620 is the Federal Housing Administration. Fannie Mae and Freddie Mac offer conventional loan financing with a hard credit score requirement of 620. By the way, mortgage lenders use the middle credit score for decision making from a financial services credit report in their own company’s name. Put simply, you are not viewing the full credit picture if you are basing your credit score from any of these entities:
- consumer credit reporting company- usually does not provide the full three credit scores, one per bureau known as “tri-merge credit report”
- credit card credit score- any credit score you receive from your credit card company, same thing applies, it is one score not all three from each bureau
- auto loan lender-this is also a one merge credit score
Mortgage lenders use a financial services specific credit report encompassing each credit bureau in their complete entirety for credit decision purposes as well as providing interest rate and loan pricing figures. Anything else is speculative at best when it comes time to getting a mortgage, let alone qualifying.
If your middle credit score falls under 620, even one digit off, a 619, you will automatically fall into a different credit category than an applicant who possesses a 620 or higher. At any rate, a 600 score is the minimum score you need to buy a home or a get a mortgage.
These Areas Will Be Examined More Closely If You Have Bad Credit
Income– The lower the credit score, the more risk the lender takes approving your loan. Ideally, your income needs to be 57% higher than any payments you have on liabilities as well as a total proposed mortgage payment. A hard 43% debt to income ratio requirement is in place in this type of scenario. A 43% payment to income ratio is consistent with the consumer financial protection Bureau’s definition of a ‘qualified mortgage’. Qualified mortgages protect the lender both from a legal standpoint as well as adhering to rules granting credit to applicants who can actually afford the home. For example if your mortgage payment is $2,800 per month on a $425,000 home purchase, and you also have other payments on tax obligations and car payments at $600 per month, you must be earning $7,906 of income to offset the debts.
Homeownership Counseling- this requirement will vary amongst lenders, but this is something some mortgage companies require in making sure they are making a loan to a borrower who fully understands what it means to be a homeowner. It doesn’t matter if the transaction you are doing is a refinance or if have previously owned a home in the past, this requirement would be applicable. If it’s required with your lender, get it done early on in the loan process as good measure.
Rate and Pricing– Your mortgage will cost more both in fees and rate. Lenders use risk based pricing charging in accordance with the risk they are making granting you credit. For example a borrower with a 620 credit score borrowing the exact same amount, will pay approximately.5% higher in rate, and approximately $2.000 more in loan fees than a borrower with a credit score 620 or higher.
If you can pragmatically raise your credit to the tune of 620 or higher range, that’s optimal. Every borrower and every credit report is uniquely different. Getting the credit score up to qualify for a loan sounds good in terms of benefit, but actually having the higher credit score remediation materialize could be something else entirely. Ironically, if you’re buying a home with mortgage financing you score will rise anyway. This action may help your score leading to a future refinance benefit down the road anyway. Such a scenario could result in a rate reduction and a subsequent payment reduction. Talk to your mortgage professional about your credit and the means you currently have to buy a home while considering what options make the most financial sense for you.
Looking for a mortgage with so-so credit? Begin by getting a free rate quote!