The terms “mortgage loan” and “bad credit” don’t really carry a positive connotation. But, even with a score of 620, and perhaps lower, you might be able to obtain a mortgage loan… You might just have to do a little extra work to make it happen.
You can’t do much without knowing what your credit score is. You’re able to obtain your credit report for free, once a year, at AnnualCreditReport.com. Another site to get a free credit report summary every month is Credit.com.
This is what you can expect when it comes time to apply:
- Your Options are Limited
You will need a minimum score of 600 in order to obtain a mortgage loan. The Federal Housing Administration is the only program in existence for individuals with a credit score below 620. Other financing institutions, such as Fannie Mae or Freddie Mac, offer conventional loan financing with a strict credit score requirement of 620.
- There are Strict Income Requirements
It’s very risky for lenders to approve a loan for someone with a low credit score. Financial institutions now require that buyers have a 43 percent debt-to-income ratio, to help minimize your chances of defaulting. This debt-to-income ratio is undeviating from the Consumer Financial Protection Bureau’s definition of “qualified mortgages.”
Basically, any existing monthly loan obligations in addition to your proposed mortgage payment cannot exceed 43 percent of your total monthly income.
To give you a better idea, if your new mortgage payment is $2,800 per month, on a strict 3.5 percent down FHA loan for a $425,000 home, while you also have tax obligations and car payments at $600 per month, it is mandatory that you be earning $7,906 to offset any liabilities.
- Homeownership Counseling Might be Required
It’s not rare for mortgage companies to require that buyers with bad credit take online counseling sessions to make sure that the notion of homeownership is fully understood. Whether you’re refinancing or have previously owned a home. The counseling suggested can usually be done with ease online. Even if you’re unsure of whether or not you need the counseling, it’s smarter to get it done as early as possible in the loan process. It says a lot about the individual looking to take out the loans required.
- Expect Higher Rates
It is the responsibility of the lenders to charge comparatively with the risk they are taking. Due to fees and interest, your mortgage will unfortunately cost you more money. An example would be where you, as a borrower, with a 620 credit score will pay a rate that’s 0.5 percentage points higher, and approximately $2,000 more in loan fees than a borrower with a credit score of 620 or higher, based on FHA’s risk-based pricing.
To raise your credit score to 620 or higher would enable you to qualify for better rates. Often times industry-specific versions of a credit score is used in the underwriting process by mortgage lenders. This means that there is a slight chance that the score lenders will see will differ slightly from the one you will see.
The Big Picture
Your credit score may rise after buying a home after making on-time mortgage payments. An improvement to your credit score might help you qualify a refinancing opportunity in the future. This refinancing can potentially net you a lower interest rate and a more affordable monthly payment.
Seek out the advice of professionals. Talk to them about your credit and what means you have to buy a home. Take time to consider all options, and allow yourself the opportunity to see what would make the most financial sense for someone in your position.