When Your Credit Score Is Too Low for a Mortgage

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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Read/Post Comments (6) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2014, at 10:44 PM, thamitastouch wrote:

    um.... hello. this article is bogus. 620 gets a mortgage for you... conventional, FHA, or VA. What kind of idiot is writing this article.

    Ps I am a loan officer

  • Report this Comment On January 19, 2014, at 11:34 PM, normgarry wrote:

    Motley Fool and Forbes have no idea what they are talking about. You can get a mortgage even if your score is in the 500's, so long as you have a sizeable down payment, job history and job security (i.e. Unionized government worker). It's called a "SUB-Prime Mortgage".

  • Report this Comment On January 20, 2014, at 10:08 AM, wmdiess wrote:

    If your FICO score is too low to obtain a mortgage, it should be telling you something. Maybe you need to get your financial affairs in order before entering the housing market.

  • Report this Comment On January 20, 2014, at 1:32 PM, Cynna5225 wrote:

    Not to mention pushing a pay for score site like myfico.com. You can go to creditkarma.com and watch your credit for free. Truly free.

    They didn't make me sign up for some crap with a credit card required and then jump through hoops on the phone with someone in India to cancel it. I can make a payment and see it show up there in a day or two on creditkarma and I can go there as often as I want without paying $14.95/mo.

  • Report this Comment On January 20, 2014, at 9:48 PM, Wolfden6969 wrote:

    Hmmm, our credit was at 662 and was turned down for a loan because of 3 bills on our credit that are almost 7 years old! We were told to pay them off or no loan...We have the income for a home but we will wait for those bills to hit their 7 year limit on our credit and try again. It's crazy, we can buy a brand new car but not a house.

  • Report this Comment On March 13, 2014, at 8:47 PM, Idahoan wrote:

    I am not quite sure why it is hard at all to get a home loan. There are SO many empty houses out there, for one. For two, home loans are cheaper than rent! What is the issue here? Something needs to happen. I really wish I would have bought a house and not a car(which constantly broke down on me). Too bad :(

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