If you’ve been looking into buying a home, you may have been learning the hard way that having “good” credit is important to lenders. But what do you do if your credit isn’t so great? Read on to learn ways you can still get a mortgage with bad credit.
How Do You Know If Your Credit Score is “Bad”?
Firstly, it’s important to understand what constitutes a “bad” credit score. The age of free online tools like Credit Karma has democratized staying on top of your credit score. If you’re new to the game, though, you may not understand what all the numbers mean.
The most commonly used credit-scoring models have score ranges of 300–850. Here is a general breakdown of what those scores typically mean:
- 300–600: “Poor”
- 601–780: “Fair”/ “Good”
- 781–850: “Excellent”
Keep in mind that these are general ranges for gauging overall your credit health. Different industries—like the auto and mortgage industry—sometimes have slightly more specific score ranges. For a more detailed look at how credit score ranges are determined and what they mean, check out this five-minute read on Credit Karma: https://www.creditkarma.com/advice/i/credit-score-ranges/.
You Have a Low Score—Now, What?
OK, so maybe your score isn’t as high as you’d hoped. Perhaps you missed a monthly payment (or two), or your credit utilization has been too high for the past few months. You still really want to buy a house, though. Here are a couple of next steps you can take to still get a mortgage with bad credit.
The hard truth is that if your credit score is in the “poor” range, most conventional lenders aren’t likely to offer you a loan. Why? Because, put simply, you appear “risky.” Poor credit scores create the impression that you aren’t responsible when it comes to paying back a loan. This is the last thing a conventional lender wants, so they probably won’t give a second thought to someone who has demonstrably bad credit. Before applying for any conventional loans, work on boosting your score by always making your monthly payments on time, paying more than the minimum amount whenever you can, and consolidating your debt.
Government-Backed Loan Programs
The good news is that there are government-backed loan programs out there that can help those with poor credit scores secure mortgages. For example, FHA loans only require a minimum credit score of 580 as long as you can make a 3.5% down payment. This is possible because the FHA insures these loans, which makes you less of a risk to lenders in case you were to go into default. Check out our article that outlines the basics of FHA loans: https://smhomeloans.com/2019/10/25/fha-loans-the-basics/. If you have a credit score of at least 620, you may also be eligible for USDA or VA loans.
Saving up for a heftier down payment is a great way to show lenders that you’re serious about paying back the loan. Forking over more money up front not only demonstrates that you’re invested (literally) in keeping the home, it also reduces the amount you’ll need to borrow. Furthermore, it’s a good indicator that you’ll be responsible when it comes to making your monthly payments. If you feel like raising your credit score a substantial amount isn’t doable right now, making a bigger down payment could be a potential workaround.
Be Aware of All of Your Options
When loan shopping, it’s important to remain optimistic. Don’t settle on a loan that may not be right for you out of frustration. The reality is that having less than perfect credit at the start of loan shopping may make things tougher and ultimately result in a couple of rejections at first. However, you may not always want to say yes to the first loan you’ve been approved for out of haste. Make sure the terms are something that are genuinely doable for you given your financial situation. Sometimes, it is better to be patient and work at slowly building your credit score before applying for loans. It may take a while, but in the end, you’ll be able to qualify for loans with better terms.
It isn’t completely impossible to get a mortgage with bad credit. In addition to taking measures to raise your credit score in the long term, you also have the option of seeking out government-backed loans with more lenient credit score requirements. Be mentally prepared for the possibility of application rejection, and don’t allow impatience to cause you to accept a loan with predatory terms.
Disclaimer: These articles are intended for general informational purposes only and do not substitute the advice of qualified mortgage professionals. Please always consult your mortgage broker or loan officer when it comes to making decisions.