A low credit score does not have to keep you from buying a home. Reviewing your credit score is a part of the mortgage approval process. What is considered “bad credit” when it comes to a mortgage or home loan? Ultimately, that designation can depend on the lender. Not all lenders have the same guidelines when it comes to determining what is bad credit. Many lenders specialize in working with clients who have a less than perfect credit rating.
For the most part, the base credit score to be approved for a regular home mortgage is 620. Some lenders will require the score to be higher, while others may permit a lower score. It helps to check your credit score before you contact a lender so that you are aware of where you stand on the credit spectrum. Most lenders will use FICO credit scores for determining whether to approve a home mortgage. Scores can range anywhere between 300 and 850.
A poor credit score may not prevent you from obtaining a mortgage, but it can certainly affect the interest rate offered with the loan. The better the credit score, the lower the interest rate will often be.
If you have a score of 620 or below, you may consider applying for a government-backed Federal Housing Administration (FHA) loan if you are not eligible for a Veterans Affairs (VA) loan. However, some FHA lenders may require a score of 620 to 640 for approval.
You can still get a conventional mortgage not through a federal government-backed lender, although it is easier to qualify with government lenders with less-than-stellar credit. Lenders will look at a number of factors when determining whether to offer you a home loan, including the down payment amount, the types of property desired, the maximum debt-to-income ration allowed, the minimum income allowed for the loan, and lender fees. It is always a good idea to shop around when looking for a home mortgage, and never take the first offer. Review the different options available to you before making a selection.
If you have a bad credit score and still would like to be approved for a home mortgage, you can improve your chances by getting a co-signer. A co-signer is someone whose credit score is better than yours and whose financial situation can help you be approved for the loan. That person will sign on the mortgage documents with you and will be equally responsible for the obligation. It is a big decision to make since your inability to pay the loan will negatively affect the co-signer’s finances, as well. Before you contact a relative to see if he or she will co-sign, review your financial situation to make sure you can make the payments regularly. If you cannot, it may be advisable to find another alternative.
It can also be helpful for the borrower to make a larger down payment when purchasing the home in lieu of finding a co-signer. Making a larger payment upfront will decrease the risk of default, making the lender more likely to issue the loan.
If you have time and can hold off on purchasing a home now, it may be advisable to work on your credit score to improve it so that you will be approved for the best loan possible.
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