Yes, You Can Get a Mortgage with Bad Credit
Are you afraid that your low credit score will forever bar you from homeownership? Relax! You don’t need a perfect credit score to qualify for a home loan. It might be hard to get a conventional loan with bad credit, but there are plenty of non-conventional options available to borrowers with lower scores. Getting a mortgage with bad credit is mostly just a matter of finding that lender who’s willing to give you a chance. Here’s what you need to know to finance your own home purchase, even if your credit isn’t fantastic.
Just How Bad Can Your Credit Be and Still Qualify for a Mortgage?
If you want to get a conventional loan, your credit score can’t be any lower than 620, though you’ll have better chances with a conventional loan if your credit score is higher – the vast majority of conventional loan borrowers have credit scores above 700. You can get a Federal Housing Administration (FHA) loan with a score as low as 500 with a 10 percent down payment, or 580 with a 3.5 percent down payment.
If you can qualify for a Veterans Administration (VA) Loan, you could technically get approved with any credit score, as there is no lower limit. However, most VA loan borrowers have credit scores in the 700 to 750 range. Some U.S. Department of Agriculture (USDA) loans don’t have a lower credit limit, either.
If you want to get a mortgage with bad credit, non-conventional loans like those available from the FHA, the VA, or the USDA are your best chance. You have to live in a rural area to qualify for a USDA loan, and you have to be an active military service member, veteran, or surviving spouse of a military member to qualify for a VA loan. However, most people can qualify for an FHA loan. You need a FICO score of at least 500, a debt-to-income ratio of no more than 43 percent, and steady employment income going back at least two years.
Keep Trying Different Lenders
While you can technically get an FHA loan with a credit score as low as 500, or a VA or USDA loan with a credit score even lower than that, that doesn’t mean every single lender is going to offer you a loan on those terms. A lender won’t make a loan unless they’re confident that the borrower can pay it back.
So, if you get rejected by the first person (or people) you talk to, keep shopping around (while working on improving your credit). If you can’t get a loan from a traditional bank, try online lenders, mortgage brokers, credit unions, and other non-bank lenders. They may have more flexibility to offer you a loan. Even once you get a pre-approval letter, you should try to get some additional interest rate offers. You could save yourself thousands just by lowering your interest rate a little bit, and getting offers from different lenders can only help with that.
Improving Your Score May Not Be Worth It
You might think that it’s better to work on your credit score for a while and then try for a home loan when your score is higher and you can get better interest rates. But the price of housing is going up all across the country, and you can’t know what interest rates on home loans will be like when you’ve finished working on your credit. It can take several months to a year or longer to repair bad credit. By that time, homes will cost more and interest rates could be higher, too. You may not save any money in the end, especially if you’re trying to get a mortgage for a house in a desirable area, like Virginia Beach.
That’s why it’s a better idea to go ahead and try to get a mortgage now with your bad credit. You can still work on your credit while you’re shopping for a mortgage – but changes can take up to 30 days to appear on your credit report. That means if you clear a debt from collections or remove inaccurate information, your credit score may not improve for as long as a month! If you’ve done some things recently that could improve your credit, but that haven’t yet showed up on your credit report, you can ask the lender to do a rapid rescore to push those changes through faster so they can count towards your mortgage application. However, only your lender can request a rapid rescore.
It’s not impossible to get a mortgage with bad credit – far from it. There are plenty of loan option available to low-credit borrowers, so you can soon get into the home of your dreams.
