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Guidelines are stricter, but homeownership isn’t out of reach
Homeownership remains an attractive goal for many Americans, but you may feel the dream is out of reach if you have a lower credit score. While buying a home with bad credit is more challenging, it’s not impossible. Read on to learn how to qualify, what lenders are looking for and which home loans are best for those with less-than-perfect credit.
Technically there is no minimum credit score required for a mortgage. Lenders choose which loan applicants are eligible based on several criteria, including:
Borrowers with low to fair credit, also known as subprime borrowers, are considered a higher risk by lenders and might not get approved for a conventional loan. If the lender agrees to finance the loan, subprime borrowers might have to pay higher interest rates.
Here’s a rundown of how different credit scores can affect your journey to mortgage approval:
FHA loans are often the easiest to qualify for because they have less strict credit score and down payment requirements. FHA mortgages are guaranteed by the federal government and pose a lower risk to lenders than conventional bank-backed mortgages. However, don’t rule out conventional loans. A conventional mortgage may still be an option, especially for those borrowers with a fair score of 580 or above.
The Federal Housing Administration (FHA) guarantees home loans provided by FHA-approved lenders nationwide. Part of the U.S. Department of Housing and Urban Development (HUD), the FHA is the largest mortgage guarantor in the country and has a long list of loan programs. Banks and lenders who participate in the programs offer FHA loans for single-family homes and multifamily properties.
The most popular home loan programs include adjustable-rate mortgages, basic home mortgage loans, condominium loans, energy-efficient mortgages and manufactured housing loans. FHA-backed loans require a down payment of 3.5% for borrowers with credit scores of 580 or higher and 10% down for borrowers with credit scores below 580. Keep in mind that each lender sets their own credit score minimums, even for an FHA loan.
Veterans of the U.S. military receive a home loan benefit that is backed by the Veterans Administration, part of the U.S. government, which lets private lenders offer more favorable terms for borrowers. Many mortgage lenders and banks provide VA-backed loans nationwide. The majority of VA loans are made with 0% down. While the VA does not set a minimum credit score for home loans, lenders who provide the loans typically ask for a minimum score of 580 or higher. Just like they do for traditional loans, lenders also consider other criteria, including income, debt and assets, when approving VA loans.
Freddie Mac Home Possible is a mortgage program with down payments as small as 3% for low-income borrowers. Income limits depend on location. For borrowers who qualify based on income and payment references, Home Possible loans are available without a credit score, which is also called nontraditional credit.
To find the best home loan available for a subprime credit score, you’ll want to vet lenders by comparing the minimum credit score needed, down payment requirements and the types of loans they’re authorized to lend (for instance, whether the company is an approved FHA lender).
To come up with our top picks, we considered these factors and looked at average customer satisfaction ratings to eliminate any lender that received poor ratings among its customers or that didn’t have substantial customer feedback available online.
Homebridge Financial Services is a privately held non-bank mortgage lending firm that services loans across the United States. The minimum credit score accepted varies based on loan type, but certain government-backed loans can be approved with a credit score as low as 550.
Homebridge’s loan programs: Conventional, FHA, VA, jumbo and super jumbo, reverse mortgage, USDA, FHA 203(k), FHA 203(h), VA 95% Cash Out, FNMA HomeStyle, Construction to Perm, Energy Efficient Mortgage, second home loans, investment property loans and special programs for those with low-to-moderate income
Mr. Cooper is an online mortgage lender that serves clients nationwide and offers support for home purchases and home refinancing. For conventional loans, you’ll need a credit score of 620, but Mr. Cooper offers government-backed loan programs that may have different qualifying scores. You can use its online pre-qualification tool to get the process started and see what you’re eligible for.
Mr. Cooper’s loan programs: Conventional, FHA, FHA Streamline, VA, VA IRRRL, jumbo loans and home refinance programs
Citi is a national bank and mortgage lender that offers financing for conventional and government-backed loan programs. Citi’s HomeRun Mortgage program is designed to help make buying a house easier and more affordable. Benefits of the program include a down payment as low as 3%, no mortgage insurance requirements, competitive interest rates and more flexible credit requirements. Loans under this program are available for as much as $510,400 to $765,600, depending on where you live.
Citi’s mortgage programs: Conventional, FHA, VA, jumbo and Citi’s HomeRun Mortgage program
Wells Fargo is a nationally recognized financial institution that services home loans for customers all over the U.S. They can help finance both conventional and government-backed mortgages for borrowers with credit scores as low as 580. Its special yourFirst Mortgage program is designed for buyers who can't provide a large down payment. Through the program, WellsFargo accepts 3% down on fixed-rate mortgages and allows the use of gift funds or assistance programs for the payment. These loans do require mortgage insurance, as many low-down payment programs do, and you may also be required to take a homebuyer education course to qualify. You can start the pre-qualification process online.
Wells Fargo’s loan programs: Conventional fixed- and adjustable-rate mortgages, jumbo loans, government-backed programs (including FHA and VA), newly constructed home loans, refinancing programs, HELOC and yourFirst Mortgage program
Another nationally recognized bank and lending institution, Bank of America is a giant in the industry. While its minimum credit score requirements are slightly higher than the other lenders on our list, it still accepts buyers within the “fair” credit score range. It offers mortgage, refinance and home equity loans. Daily loan rates are clearly posted on its website, and you can pre-qualify online. Its Affordable Loan Solution program may be available with as little as 3% down and has lower income requirements. Participants in the program may be required to take educational courses by HUD-approved financial counselors. They may also need to obtain mortgage insurance.
Bank of America’s loan programs: Conventional, jumbo, FHA, VA, Freddie Mac Home Possible mortgage and Bank of America’s Affordable Loan Solution mortgage program
Quicken Loans is one of the largest mortgage lenders in the United States. Quicken works with both conventional and government-backed programs and accepts credit scores as low as 580 and down payments as low as 3% with specific programs. You can apply and find rates online. Quicken also offers mortgage affordability calculators and other interactive tools to help you determine if it’s the right time to buy.
Quicken’s loan programs: Conventional, FHA, FHA streamline, VA, USDA jumbo, HARP refinance and Quicken’s YOURgage program designed for flexible loan terms with a fixed rate
While mortgages are available for borrowers with low credit scores, there are some downsides to purchasing a home with a subprime credit score. Down payment requirements will be larger and fees will be higher. If your loan is approved with a lower credit score, the biggest downside you’re likely to face is a higher interest rate, which means you will pay more for the same house than an individual with good credit.
To illustrate how much a bad credit score can cost on a mortgage, we compared common rates for good credit borrowers and fair credit borrowers to see costs over the life of a 30-year fixed mortgage.
|Credit score||APR||Mortgage amount||Total 30-year cost of loan|
With bad credit, expect to pay a down payment when purchasing a house. Even home loans designed for low-income borrowers, such as USDA-guaranteed mortgages, require applicants to meet certain credit qualifications for no-down-payment loans, also referred to as 100% financing.
Homeownership is possible for those with bad credit and low income. USDA and Freddie Mac Home Possible loans are available for borrowers with nontraditional credit who pay their rent and bills on time, have steady employment, hold significant savings accounts and can make a down payment. The USDA does not set a minimum credit score requirement, so approval for borrowers with bad credit and low income depends on the lender.
If one spouse has bad credit and the other has good credit, you can purchase a home by maximizing your savings using both incomes to come up with a sizable down payment and applying for the mortgage in the name of the spouse with better credit.
If you can, take a few months to rectify the poor credit situation by paying bills on time, lowering your credit utilization and paying down debt to reduce your debt-to-income ratio. While it might cost more in the short term to get your finances organized and paid off, a better credit score saves thousands of dollars over the life of a mortgage.
Some mortgage companies specialize in lending to bad credit borrowers. Sometimes called “hard money lenders,” alternative financing companies typically charge high interest rates and require a large down payment for a home purchase. Borrowers will need to prove their ability to repay the loan. Alternative loan types include short-term loans and owner-occupied loans.
Lenders set the interest rates for mortgage loans based on borrower eligibility. Experian reports that the average mortgage rate for a credit score of 620 is 4.11%. For credit scores lower than 600, borrowers will pay a higher rate, depending on the lender and factors such as income, loan amount, down payment and creditworthiness.
FHA lenders will consider approving a borrower who is still making payments on a Chapter 13 bankruptcy if those payments have been made on time for at least 12 months. Chapter 7 filers must have passed two years from the discharge date of the bankruptcy, show proof of stable income and have reestablished a good credit history.
A foreclosure has a negative impact on your credit score, which is a major factor in determining eligibility for a mortgage. Borrowers with a foreclosure on their credit history can still get home loans from some lenders, however. If a foreclosure is less than 7 years old, lenders will probably be less likely to approve your home loan, charge higher interest rates and require a larger down payment. Fannie Mae and Freddie Mac home loans require a seven-year waiting period after a foreclosure, while USDA and FHA loans require three years. A VA loan only requires two years to have passed from foreclosure.
Many types of home loans, including USDA and FHA loans, are eligible for refinancing. Mortgage lenders who specialize in bad credit lending might have restrictions on refinancing. Refinance options are available for those who took out a mortgage with bad credit and then improved their credit scores.
Some types of funding are available to make homeownership possible for borrowers with poor credit. These sources of funding typically have high interest rates and sizable down payments. The approval will require the borrower to meet other income and financial criteria.
It’s generally better in the long run to work on your credit score for a while before buying a home with a mortgage. If you can delay a home purchase a few months or years while taking the time to improve your credit score, you’ll be rewarded in the long run with lower interest rates that will save significant amounts of money. Here are a few steps you can take to start working on your credit score today.
Check and compare current mortgage rates and get the lowdown on terms and loan types. Plus, find answers to your mortgage questions.
Looking for an online mortgage lender? Check out our top picks to compare requirements and customer satisfaction. Find the best lender today.
Buying your first home? Check out Rocket, Better, New American Funding and more of our top lender picks. Plus, get answers to mortgage questions.
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