Contrary to what you may hear or read, your credit does not have to be stellar to get a mortgage. Most banks and lenders require at least a 640 credit score. However, not all lenders are created equally. Here is what you need to know if you are trying to get a mortgage with bad credit.
For Conventional Mortgages you generally need at least a 620 credit score. Lenders are going to look at your credit score from each bureau. They will take the middle score from the three and use that as the deciding score.
For FHA Mortgages some lenders go as low as 600, some even as low as 580, with just 3.5% in equity. The magic credit score needed to get a mortgage, however, is not 580. Shockingly enough you can get a mortgage to purchase, or even do a Cash-Out Refinance, with a credit score as low as 550. However, there is a catch. That catch is you need at least a 10% equity position. This means you need 10% down when buying a home or 10% equity when refinancing. Not all lenders have this capability and it has to do with their tolerance for risk. The more risk a bank is willing to take on, the higher your chances are to get approved. Here is what you need to know. The process for getting a mortgage with a credit score under 600 is not going to be easy. It is going to be difficult and it is going to involve thorough explanations of your credit history.
The following is what you should be prepared for.
Rebuilding credit – If you are looking to increase your credit score to have an easier time with the process, all things being equal, your credit score would really have to be well in excess of 620. This would stop it from going through the same type of scrutiny you otherwise would go through in a lower tier credit score bracket.
Down Payment Assistance – This is an eligible program that typically requires a 640 credit score. You can expect this across the board with most banks and lenders. It is reasonable to assume you are ineligible for this type of a loan if your credit score is under 640.
Previous short sale, bankruptcy or foreclosure – These things will still carry the same waiting time, which is three years on a foreclosure and a short sale. The waiting time on a bankruptcy is two years. After these time periods, you are eligible and your credit score does not have bearing.
Higher debt-to-income rations – It is no secret FHA loans also allow debt-to-income ratios in excess of 54%. In order to be eligible for that type of financing, the credit score should be in the neighborhood of 640 or higher. This is not to say that if your credit score is 620, for example, it will not work. However, it is almost a guarantee that if your credit score is less than 600 you are going to have a difficult time getting a loan approved with a debt-to-income ratio exceeding 45%.
Pay off debt to qualify – This is a big one. Paying off debt to qualify is a little known trick in the lending world you could use to your advantage. For example: You could do a Cash-Out Refinance with your home. This would allow you to pay off installment loans and credit cards, which often carry a significantly higher rate of interest than any home loan. Wrapping them into the payment would significantly save you money and it is an option with lower credit scores.
If you have been turned down for a mortgage due to your credit score not being good enough, or your debt-to-income ratio being too high, get a second, maybe even a third opinion. If anyone is telling you this will benefit you, it is worth it to continue your hunt to find a good lender. One that understands how to put together a good loan and will fight for you.
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Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.