About 15% of American consumers have credit scores in the 500 to 599 range on an 850-point scale, which is considered poor to fair credit, according to FICO. Another 10% are in the 600 to 649 range, which is considered fair credit. You’re in good company if your score is less than ideal, and the right lender can help you get a mortgage or explain how to get approved in the future.
What Is a Bad Credit Score for a Mortgage?
A bad credit score for a mortgage is one that doesn’t allow you to get a loan, only lets you get a more expensive loan or requires a larger down payment in order to qualify for a loan. What’s considered “bad” depends on the type of loan you’re applying for: conventional, FHA, VA or USDA. Most successful homebuyers—about 93%—have credit scores of 650 or higher, according to Ellie Mae, a technology solutions provider for mortgage lenders.
Borrower FICO Scores on Completed Purchase Mortgages
A steady income, a small amount of debt compared to your income and a significant down payment can help you get a mortgage despite a bad credit score. But if your score is below 500, you’ll almost certainly be rejected. A recent foreclosure or bankruptcy can also really hurt your score and keep you from getting a loan for at least one year—and possibly several years.
What Is the Minimum Credit Score to Get a Mortgage?
The minimum credit score to get a mortgage depends on which type of mortgage you’re applying for. It also depends on which lender you’re working with. Some lenders are more willing to work with low-credit-score borrowers than others.
Conventional Mortgage Credit Score Requirements
Conventional mortgages have the strictest credit score requirements, but they’re still more lenient than you might think.
Freddie Mac and Fannie Mae, the two huge companies that help make conventional mortgages widely available, have strict credit score requirements for borrowers making the minimum down payment of 3%: Freddie Mac’s minimum credit score is 660 and Fannie Mae’s is 620. Freddie will allow a credit score as low as 620, too, but only with a down payment of at least 25%.
Most lenders follow these rules because after they close your loan, they sell it to one of these companies. The table below shows how few borrowers get conventional loans with credit scores below 700.
Borrower FICO Scores on Completed Purchase Mortgages, Conventional Loans
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Sometimes lenders grant exceptions if a borrower’s credit score is below the minimum because the borrower doesn’t have enough credit history. However, that’s different from having a bad credit history. It’s only an option if the items that do appear in that limited history aren’t derogatory and if the borrower can prove their creditworthiness with verifiable payments that don’t appear on traditional credit reports, such as rent or utilities.
Conventional borrowers who barely make the credit score cut-off will usually need a debt-to-income ratio no higher than 36% and must be buying the home as their primary residence. Lenders may also require at least two months of cash reserves.
FHA Loan Credit Score Requirements
You can get an FHA loan with a credit score as low as 500. However, if your score is 500 to 579, be prepared to put 10% down. With a score of at least 580, you can put down just 3.5%. FHA loans have the second-loosest credit score requirements after VA loans and are quicker than conventional loans to offer borrowers a second chance after a bankruptcy or foreclosure.
Still, you might find that some FHA lenders will not work with you unless your score is at least 620. They’re allowed to have their own, stricter requirements. As a result, you may have to put more work into loan shopping if your score is below 620. Most FHA borrowers have credit scores in the 650 to 699 range, as the table below shows.
Borrower FICO Scores on Completed Purchase Mortgages, FHA Loans
VA Loan Credit Score Requirements
VA loans have the most generous credit score requirements: there’s no minimum credit score. No other mortgage offers this benefit, but these loans are only open to eligible military service members, veterans and surviving spouses.
Like FHA loans, they’re more forgiving of negative credit events, but again, lenders can set their own minimums and might require a higher score. The average homebuyer who closed on a VA loan within the last year and a half had a credit score in the low 700s.
USDA Loan Credit Score Requirements
USDA loans have different credit score requirements depending on the program and the lender. Section 502 Guaranteed Loans, for example, don’t have a minimum credit score requirement. USDA mortgages are available to low- to moderate-income borrowers who want to buy a home in an area with a population of less than 35,000.
Low Credit Score Costs
On a 30-year fixed-rate mortgage for $150,000, having a credit score of 620 to 639 could cost you tens of thousands of dollars more over 30 years compared to having a credit score of 760 or higher. Check out the table below to see how much more you’d pay.
Still, 4.5% is, historically speaking, a great interest rate. There’s hardly been a more affordable time to get a mortgage if you have bad credit.
Improving Your Credit Score Vs. Getting a Mortgage Now
You could spend several months or more improving your credit. But what will happen to interest rates during that time?
- If they go up, you may not save any money despite your improved credit.
- If they go down, you could save money from both your improved credit and the market’s lower rates.
No one knows where interest rates are headed. The country’s most educated guess comes from the Federal Reserve, so that’s a good source to consult.
In the press release section of the Federal Reserve website, look for the most recent economic projections from the Federal Open Market Committee (FOMC). Do they think the federal funds rate is headed up or down?
If they think it’s headed up, mortgage rates could be headed up. Right now, they expect the federal funds rate to stay around zero through 2021 and possibly 2022. But that’s a prediction, not a guarantee.
5 Tips for Getting a Mortgage with Bad Credit
- Know your options. If you can’t qualify for a conventional mortgage, what about a VA, USDA or FHA loan?
- Don’t give up easily. You may hear a lot of no’s from lenders before you hear a yes.
- Try a mortgage broker. They may know which lenders are the best match for your circumstances. (Lenders pay mortgage brokers; their services are free to borrowers.)
- Spend a few months improving your credit before applying for a mortgage. Paying down high-balance credit cards, making on-time payments and disputing credit report errors can help your score considerably.
- Save up a down payment of at least 10%. Lenders will see you as less risky when you have more skin in the game.
Source: Forbes
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