If you current credit score is in the fair, poor, or bad range you may think that your dreams of qualifying for a mortgage are over. While that may be true for the majority of potential home buyers with low credit, there are some options for home buyers with less than a perfect credit score. Dean Graziosi explains some of the ways in which you can still obtain a mortgage with poor credit.
Lenders base their decision to approve a loan on the strength of your credit score. They use this number to determine how you have managed your credit in the past and how well you can handle the addition of a mortgage. If you’re unsure of what your credit score is, you can request a free copy of your credit report from the credit reporting agencies. When you receive your credit report, you should look over it carefully and take note of any errors that the report may contain. If your report contains any errors, you should contact the credit reporting agency at once and have them taken care of. It’s recommended that you take care of this before you apply for a mortgage. If your score is still too low for a lender to approve you, they may offer you some quick steps which can help you improve your credit score.
Prior to the housing crisis borrowers were approved for mortgages with having to provide proof of their income and assets. During this time subprime lenders often approved loans for borrowers with low scores, which cost them more in higher interest rates. Since the housing crisis, a lot of subprime lenders have gone out of business, but you may still be able to qualify for a mortgage.
The most common way for borrowers to get approved for a loan with a low credit score is through the Federal Housing Administration’s program. The FHA insures lenders against default and requires that borrowers have a credit score of 580 or higher and a down payment of 3.5%. However, the majority of lenders still require that borrowers have a credit score of 620 and higher to approve their FHA loan. Borrowers will also need to provide lenders with documentation of their income and assets. Dean Graziosi states that they will also need to meet the debt-to-income ratio set by lenders.
While FHA loans are a lifeline for borrowers with poor credit, there is also a downside to these loans in that they typically require higher mortgage insurance requirements than a conventional loan. Borrowers must make these insurance payments for the entire length of their loan unless a larger down payment can be made. While obtaining a home loan with poor credit may be more difficult, it is not impossible.