First, consider getting your mortgage right away, before interest rates and real estate prices rise, if you’re ready to buy a home.
What is a bad credit score for getting a mortgage?
The only factor lenders rely on when evaluating a mortgage application is the applicant’s credit score. If you’re wondering what a credit score is, it’s a three-digit number ranging from 300 to 850 that represents how likely you are to pay your dues and bills on time.
Anyone with a credit score below 620 requires special treatment when they need to obtain a mortgage. While this is considered a fair score, it is too low for a conventional mortgage.
Frankly, if you have a credit score below 620, you will need to use a government-backed loan program.
What credit score is too low to get a mortgage?
Mortgage lenders rely on two credit scoring systems, FICO (Fair Isaac Corporation) and VantageScore 3.0. Both systems rank and assign ratings from “very poor” to “excellent” for credit scores.
Under the FICO credit scoring system, you can qualify for a government-backed Federal Housing Administration (FHA) loan even with a score of 500, but you will have to make at least 10% of the down payment. Although, independent FHA lenders set their own requirements.
However, it is always best to keep checking your credit report periodically and, if necessary, go to a credit booster to quickly improve your credit score.
In addition to looking at your credit score, lenders also consider the following details when evaluating your loan application.
- Debt-to-income ratio
- Loan-to-value ratio
- Down payment
- Employment
What types of mortgages can you get with bad credit?
Fortunately, some mortgages have lower credit score requirements than others. Government-backed loans, such as those from the U.S. Department of Agriculture and the U.S. Department of Veterans Affairs, may offer flexible credit requirements like FHA.
FHA Loans
FHA is not a mortgage lender, but offers insurance on loans from lenders it has approved.
FHA loans are intended for borrowers with low credit scores and low down payments, as they may not be eligible for a conventional loan.
Conventional Loans
Conventional loans are not part of any government loan program. Therefore, they are offered by traditional mortgage providers such as banks, credit unions, private lenders and non-bank lenders that typically operate online.
VA loans
Although these loans are offered to borrowers by mortgage lenders, they are underwritten by the Department of Veterans Affairs. The VA does not set any minimum credit score requirements or require a down payment.
USDA Loans
The U.S. Department of Agriculture sponsors two different types of home purchase loan programs designed specifically for low- to moderate-income buyers who wish to purchase a home in rural or suburban areas of the country.
The first program is a USDA-backed loan offered by private mortgage lenders, and the other program is a direct USDA-financed loan.
Both programs require no down payment, but the borrower must meet income requirements and property criteria.
| Loan Type | Designed For | Minimum Credit Score Requirement | Other Requirements |
| FHA | Borrowers with low credit scores and a down payment of less than 20% | 580 at a 3.5% down payment and 500 at a 10% down payment | Steady income, proof of employment, and a debt-to-income ratio of less than 43% |
| Conventional | All borrowers | 620 (a few lenders may demand a higher score) | – |
| VA | Active duty and retired military personnel, veterans, and surviving spouses of eligible service members | Between 580 and 620 | Service time and eligibility criteria |
| USDA | Low to moderate-income homebuyers looking to purchase a home in rural or suburban areas | 640 (for a score as low as 600, you’ll need to undergo a manual underwriting process requiring a detailed look at your finances) | – |
Three simple steps to improve your credit score
1. Pay down your debts.
One of the best ways to improve your chances of getting a mortgage is to reduce your debt. If you have any payments on your credit card, cancel them if possible or at least reduce the outstanding balance. Also, avoid making new charges on the account.
Your payment history is an important part of your credit score. If you currently have any loans, be sure to pay them on time, without missing a single payment. Demonstrating that you can pay your loans on time shows lenders that you can pay responsibly.
2. Don’t close an existing credit card or get a new one.
Closing an existing credit card can affect your score in several ways.
First, it can reduce your credit limit and affect your utilization ratio, one of the important factors that make up your credit score (The ideal credit utilization ratio should be less than 30%).
The second effect of closing an existing credit card is that it can reduce the average age of your credit accounts, which is more relevant if it is an older account. The longer the credit history, the more your score will increase.
Third, opening a new credit account can make it more difficult to get approved for a mortgage, as the lender performs a hard credit check when you apply for a new credit card or loan, which lowers your score by a few points.
3. Consider other alternatives.
Some credit reporting agencies will consider alternative information, such as your utility payments, and include them on your credit report. If you have never missed a payment, this may increase your credit score.
You may also consider consolidating your debts into one loan, which can help lower your monthly payments and save on interest.
If you have rented a home and have been regular with your payments, you can get that information added to your credit report.
Read the top 10 tips to improve your credit score fast.
The bottom line
There’s no need to put off buying a home even if your credit score isn’t the best. According to some experts, now is the time to go with what you have, even if you have to pay more for a mortgage. In today’s market, you’re in a race against time as home prices and interest rates continually rise.
You could wait a year or two to improve your score and get a better interest rate, but rising home prices can negate any improvement in your credit score.
More than anything, you need to make sure you’re mentally prepared to take on the biggest loan you’ve ever had.
If you’re still thinking about how can I fix my credit, consider taking the help of a credit repair company like us, which will evaluate your credit report, identify any errors and dispute them with the credit bureaus to have them removed.
