The real estate industry does a great job at scaring potential homeowners away with dollar signs and a process full of paperwork. Many people think that without credit, they can’t qualify for a mortgage and therefore can’t become a homeowner due to a low credit score. Mortgages for people with bad credit are abundant, but they will cost more in the form of higher interest rates and fees. Many mortgage lenders offer borrowers financing with credit scores as low as 580. Here are some facts for people who want to apply for a mortgage but have bad credit.
Low Credit Score Mortgages
For borrowers with credit scores lower than 600, there are lenders willing to provide financing. For example, lenders offer mortgages backed by the Federal Housing Administration with credit scores ranging from 550-580. To qualify, borrowers typically need a 10 percent down payment with a debt-to-income ratio that does not exceed 45 percent. Borrowers will also need to explain to lenders why their credit scores are low and detail their financial hardship that caused their scores to drop.
Below Average Credit Scores
Lenders typically consider credit scores that range from 600-650 as below average. According to statistics, nearly 20 percent of all borrowers who apply for an FHA loan has a credit score that falls within this range. In most cases, borrowers need a score of around 640 to secure an FHA mortgage if their debt-to-income ratio exceeds 45 percent.
Average Credit Scores
Many lenders consider credit scores that range from 650-700 as average. If a borrower has a score in this range, they may qualify for a conventional mortgage backed by the government-sponsored agencies Fannie Mae and Freddie Mac. The minimum credit score requirement for the two agencies is usually 620, but a score of 640 is typically needed to secure financing with a minimum 10% down payment.
Consumers who want a mortgage but have bad credit can increase their chances of qualifying by providing a bigger down payment. The best down payment amount is 20 percent of the home’s value or the purchase amount.
In addition to a bigger down payment, many consumers fail to prepare before shopping for a mortgage. Preparation for consumers means pulling copies of their credit reports and learning the facts behind their current financial situation before applying for a mortgage. Potential homeowners who know where they stand financially will have a better chance of qualifying for a mortgage, even with bad credit.