When Your Credit Score Is Too Low for a Mortgage

What to do if your credit score is too low for a mortgage.

Jan 19, 2014 at 1:24PM

Mortgage lenders have tightened their credit requirements since the freewheeling lending days that led to the financial crash. Borrowers need, in general for a conventional mortgage, a minimum FICO score of about 650. Remember, the higher your credit score, the lower you mortgage interest rate will be.

With a lower credit score, expect to put more down
With a lower score, the best thing that you can do to increase your chances of getting a mortgage is to increase your down payment. The more equity you have in the property, the less the risk is to your lender.

Consider alternative mortgage sources
The U.S. Department of Veteran Affairs has a program that helps service men and women, veterans, and qualified surviving spouses become homeowners. The VA does not loan money but offers lenders a guarantee on your home loan equal to 25 percent of the approved loan up to the maximum allowed for the year. Although the VA does not set minimum FICO scores for mortgages, its partners have set a minimum of 620 as a credit score for a VA mortgage.

Another option is see if you can get a Federal Housing Authority (FHA) mortgage. Because these loans are backed by the government, lenders are more forthcoming to borrowers with less than stellar credit. Although higher scores are always preferable, FHA policy requires a minimum FICO score of 580 for a 3.5 percent down payment. With a credit score between 500 and 580 the down payment must be 10 percent.

The US Department of Agriculture has a home loan program for which you may qualify as well. The program is designed to assist rural residents with moderate incomes.

Raise your FICO score
If your credit score is too low for a convention mortgage, the best solution is to raise it. Step one is to get your credit reports from all three credit reporting agencies.  A credit report is not the same as a score but the reports will tell you how you are handling your debts. You can get your FICO score directly from myfico.com while you're entitled to get a free annual credit report from Experian, TransUnion and Equifax through AnnualCreditReport.com. Be sure to scrutinize the reports for inaccuracies. It doesn't cost anything to dispute inaccurate information. Identity theft is becoming more common. If you see any accounts that you did not authorize, you'll probably have to file a police report as the first step for having them removed.

Beyond that, you can improve your score, by paying your bills on time and getting the percent of credit utilized lower.

Both the Federal Trade Commission (FTC) and the Consumer Finance Protection Bureau (CFPB) warn consumers to be very leery of companies that claim they can raise your credit scores by removing accurate records of delinquencies. This behavior of these companies is governed by the Credit Repair Organizations Act (CROA) which made it illegal for credit repair companies to mislead you about what they can do and to charge you in advance for their services. Everything a credit clinic does for your has to be spelled out in advance with a time frame for results and the total cost you pay, while you're given a three day right to rescind the contract without a charge.

A better path is to turn to  respected nonprofit organizations like HomeFree-USA and HOPE NOW for help in getting your credit score to the point where you'll qualify for a mortgage on the home of your dreams.

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A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

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