Our Picks of the Best Mortgage Lenders for Poor Credit
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Life doesn't always turn out as we expected or planned. You may have worked hard to be very financially responsible, living within your means and paying bills off on time -- only to be whacked with an enormously costly medical expense that wrecked your credit score. Alternatively, you may have lived without much financial discipline up to now, paying some bills late, racking up gobs of credit card debt, and giving little thought to your credit score, which is now rather low.
No matter how you got there, if you have a poor credit score, you may be wondering if you can buy a home with that credit. Specifically, for example, can you buy a home with a 500 credit score? Or can you get a house with a 550 credit score? Fortunately, you probably can find some bad credit mortgage loans to consider.
Here's a review of the best mortgage lenders for poor credit, along with some critical information on credit scores and interest rates and the home-buying process.
Mortgage loans for poor credit
Getting a conventional mortgage is not your only option, if your credit record leaves a lot to be desired. There are various programs available that might lend to those with poor credit scores -- and that require low down payments, too.
Look into getting a Federal Housing Administration (FHA) loan. FHA loans are insured by the FHA, which makes lenders happy, as they're therefore less risky. FHA loans can be made to borrowers with credit scores as low as 580, sometimes with down payments of only 3.5% required. That can make buying a home much more possible than you might have thought.
If you're a qualifying veteran, a military service member on active duty, or one of certain National Guard and Reserve members, you may qualify for a home loan from The Department of Veterans Affairs ("the VA") -- with no down payment required. VA loans are made by private lenders such as your local bank or credit union and are then guaranteed by the VA. These lenders will each have different requirements for their borrowers, and a credit score of at least 620 or so is common.
One more option to consider is a Single Family Housing Direct Home Loan (sometimes called a "Section 502" loan) from the U.S. Department of Agriculture (USDA). For eligible home buyers, there is no down payment required, and a poor credit score will not necessarily rule you out, though there may be more hoops to jump through.
What is a bad credit score?
The lowest tier of FICO credit scores is 579 and lower. FICO scores range from 300 to 850 with the average score being measured around 680. Here are the other FICO score ranges.
|FICO Score Range||Rating|
|800 and higher||Exceptional|
|579 and lower||Poor|
If your credit score is, say, 530 or 600, you can see that it leaves a lot to be desired. (Note, though, that credit scores can be improved! More on that soon.)
How to find your credit score
Do you know what your credit score is? Many people do -- often because scores are now printed on some credit cards’ monthly statements, or on car loan statements. Plenty of people have no idea what their credit score is, though, and that's dangerous, because a low score can be hurting you in ways you're not even aware of.
So how can you find out your credit score? Well, first take a close look at your credit card statement or your car loan paperwork to see if it displays your score. If not, you can buy access to your score -- or get it for free. With any "free" access, read the fine print to see if you're signing up for anything in the process, such as a credit monitoring service. A quick Google search for "what's my credit score?" recently turned up some free offers from sites that take no money from you but do require you to open an account with them. Some other sites offered a free or $1 score if you signed up for a free trial of a service, with post-trial charges of $20 or more each month if you don't cancel.
You might also consider going right to the source. At myFICO.com, for example, you can get a one-time copy of your FICO credit score and a credit report from one of the three credit reporting agencies for $20 or scores and reports from all three agencies for about $60. Alternatively, you can sign up for copies of your score and report on an ongoing monthly or quarterly basis for, respectively, $40 or $30 per month.
How does your credit score compare to others?
Once you know your score, you may want to know how you compare to others -- and just how poor your score is (or isn't!). Here is some context for you. The Experian credit agency offers this information for FICO scores:
|Credit Score||Rating||Percent of People||What It Means When You Want to Borrow Money|
|300-579||Very Poor||17%||You may be denied credit, or may need to pay extra fees or deposits|
|580-669||Fair||20.2%||You'll be considered a sub-prime borrower and will be offered worse-than-average interest rates|
|670-739||Good||21.5%||You'll likely be offered average interest rates|
|740-799||Very Good||18.2%||You'll likely be offered better-than-average interest rates|
|800-850||Exceptional||19.9%||You'll be offered the best interest rates|
Interestingly, credit scores generally tend to rise as we get older. That may be due to people getting smarter about their money management and learning from mistakes over the years. Here, via time.com, are average scores by age group, as of April 2017:
|Age Group||Average FICO Score|
|60 and older||743|
The averages start out merely in "fair" territory at younger age groups, before ending up in "very good" or "excellent" terrain later in life, depending on the rating system you consult.
How credit affects mortgage rates
After all this, you might be wondering whether credit scores really matter all that much. They do indeed -- possibly much more than you would have expected.
Lenders want to know that you're a good credit risk and are unlikely to default, so they place a lot of importance on your score when they decide what interest rate to offer you. Check out the table below. It reveals just how influential a credit score can be and what a difference a good one can make, showing recent interest rates for someone borrowing $200,000 via a 30-year fixed-rate mortgage:
|FICO Score||APR||Monthly Payment||Total Interest Paid|
The difference between the highest and lowest interest-rate range in the table above is $195 per month (which is $2,340 per year) in mortgage payments -- and about $70,000 in total interest paid! Having a high credit score can save you tens of thousands of dollars.
Your credit score can have an effect on other parts of your financial life, too, such as when you are looking to rent a house or apartment or are shopping for insurance. The higher your score, the easier time you'll have. Poor credit scores can result in landlords asking for bigger deposits or for co-signers on a lease.
Can you buy a home with low credit?
If your credit score falls into the "poor" category in the table above, you may reasonably be asking yourself questions such as "Can I get a home with a 500 credit score?" or "Can I get a home with a 550 credit score?" The good news is that there's a decent chance that you can. It just might take a little more work and might cost you more money, too. But read on before shrugging your shoulders and deciding to not bother trying -- because there are mortgage loans for low credit scores.
How to get a mortgage with poor credit
Here are some critical things to know and steps you can take in order to secure a mortgage despite a poor credit score:
- Dig into why your credit score is low. Conventional mortgages financed through Freddie Mac or Fannie Mae generally require a credit score of at least 620. But if a mortgage lender takes a closer look at your credit record beyond your credit score, you might get cut some slack, because the cause of the low score can make a difference. If it's clear that your score took a hit due to debt from big medical bills, that can be more excusable than if you've simply been late multiple times paying your rent or making other payments. You might even include a letter with your application, explaining your circumstances and why your credit score is low.
- Build up your cash savings. Having ample resources can also help secure a mortgage loan with a low credit score. Perhaps, for example, your credit score stinks -- but you have plenty of money in the bank and a sizable income. Positive factors can offset negative ones to some degree.
- Pay bills on time. Keep in mind that the lender is very concerned about how likely you'll be to make your mortgage payments. Thus, if you're someone with a lot of debt but also a lot of income and assets, that's not as bad as being someone with a history of not paying bills.
- Make a bigger down payment. If you can make an extra-big down payment on your home, that can make a difference, too, as lenders will see you as having more skin in the game.
- Find a lower priced home. It can also help to set your sights on a less expensive home, as that means a smaller loan request from the lender. A smaller loan means smaller monthly payments, too, which might better match your monthly income.
- Keep your debt-to-income below 43%. Lenders take your total debt situation into consideration. They typically don't want to let you have total payments on debt (which include car loans, credit card debt repayments, and the mortgage you're interested in taking on) amount to more than 43% of your monthly income. If your total debt payments would be more than 43% of your income, consider paying down some debts before applying for that mortgage. The lower the percentage, the better.
- Pay rent on time for 24 months. Another strategy as you investigate the best mortgage lenders for poor credit is to demonstrate that you've made one or two years' worth of on-time rent payments. Landlords don't typically report on tenants to credit agencies, though, so such payments probably won't be automatically included in your credit report. Instead, you might need to sign up (and pay for) a service that will collect the information and report it to the agencies. These include ClearNow, ERentPayment, Rent Reporters, Rental Karma, RentTrack, among others. Just read up on them first, and check their fine print.
Be strategic when seeking a mortgage with low credit
Keep in mind that even if you manage to qualify for a loan, the best mortgage lenders for poor credit will not be offering you great interest rates, so the home-buying process will cost you more over the life of the loan. For that reason, it can be well worth it to try to increase your credit score before trying to buy a home.
If you can’t wait, here's another strategy: You might take on a mortgage with a poor credit score that's offered to you now, despite the unfavorable interest rate, while you work to increase your credit score. If, a few years later, it's much higher (in part due to your having made all your mortgage payments on time), you can refinance into a better loan with a better interest rate. One risk with this strategy is that interest rates in general might rise during the period that you're boosting your score, and you may end up with new payments that are only somewhat better than you started with.
Finally, a little encouragement: About 20% of mortgages are offered to people with credit scores less than 600, per the folks at debt.org. So don't ever assume that there are no mortgage loans for low credit scores.
How to increase your credit score
How can you increase your credit score? Well, one relatively painless way to start is to review your credit reports to see if any faulty information has been reported about you. (It's not that uncommon.) If your credit histories contain errors, then your credit score will not be representing you accurately. You can get free copies of your credit reports once a year from each of the main credit reporting agencies at www.annualcreditreport.com -- and it's smart to do so, no matter what your score is. If you spot errors, each agency has ways for you to go about getting them fixed.
You can also consider putting off the home-buying for a year or two. In that time, you can work to increase your credit score -- and that higher credit score might end up saving you tens of thousands of dollars in interest paid.
The most effective ways to improve your credit score are tied to the components of the score. Improve the components, and you'll improve the score. Here are the components of a typical FICO credit score, and the influence that each has on the score:
|Component of Credit Score||Influence on Credit Score|
|How much you owe||30%|
|Length of credit history||15%|
|Other factors such as your credit mix||10%|
Here are some ways to boost your score:
- Pay all your bills on time. Just about any creditor, such as landlords and storage unit owners and others, can report you to credit agencies. Even a late or unpaid library fine can end up dinging your score, as can overdrawing on a line of credit at your bank that's meant to protect you from overdraft fees.
- Keep debt levels low. Aim to have borrowed only about 10% to 30% of the sum of all your credit limits. Lenders don't want you to have maxed out your credit limits or even to come close. (Getting your credit limits increased can also help improve the ratio.) One of the most effective ways to get out of debt is to pay off your high-interest-rate debt first.
- Don’t close old accounts. You can't control the overall length of your credit history too much, but you can be sure to not close out old credit card accounts, as older histories are more valuable. Similarly, if you have, say, a three-year car loan and you're thinking of paying it all off at once, know that it can help your credit score to keep that loan on the books for the full three years, with the record showing that all payments were made in a timely fashion. Opening new credit card accounts can hurt your score, as it will lower the average age of your credit accounts.
- Rate shop the smart way. If you're shopping for a mortgage or anything that results in your credit score being looked up by a lender, try to do so within two to six weeks. A lot of inquiries can lower your score temporarily, but less so if they're bunched together. It can also be worth delaying getting a mortgage for a year or two, if need be, if you can significantly boost your credit score during that period.
- Use various types of debt, within reason. Aim to have a varied mix of debts, such as a car loan, a store credit card, and a credit card account or two. Lenders like variety, and they especially like seeing a credit card account that has been managed well, with bills paid on time.
A poor credit score is a financial burden, costing you more when you want to borrow -- and sometimes interfering with other financial aspects of your life, too. Fortunately, it doesn't mean you will not be able to get a mortgage -- and it doesn't have to stay low, either.