Get a mortgage despite bad credit — with the right loan
If you have bad credit
- Find out your credit score and report any inaccuracies.
- Consider a mortgage insured by the Federal Housing Administration.
- Make mortgage payments consistently to boost credit.
- You can potentially improve your position with a refinance.
Commercials frequently implore consumers to check their credit scores. Without a good score, these advertisements warn, people will have a tough time getting a credit card, buying a car or obtaining a mortgage.
For potential homebuyers, this can raise a pair of vital questions: What is a good credit score, and if your score is not up to snuff, can you still find a lender to get a mortgage and buy a house?
Know your score
Experian, one of the three credit-reporting agencies in the U.S., says "a score above 700 usually suggests good credit management. Americans are entitled to receive a free report annually from each of the reporting agencies, and those can be requested at annualcreditreport.com.
When reviewing your credit reports, make sure everything listed is accurate. If there are any inaccuracies, that could mean your score is incorrect, which could have a major impact on your ability to get a loan.
Even if everything on your report is accurate, however, and you still have a score below 700, it is possible to obtain a mortgage. It can even be possible to buy a house with a score below 600.
Find a loan
Lenders make the final decision on whether they will approve a loan. If your credit score is low, many lenders may deem you to be too risky a borrower and deny the loan. This is where a Federal Housing Administration (FHA) loan may become an option.
These loans are still provided by lenders, just like a conventional loan, but they are insured by the FHA, which protects the FHA-approved lender against default, making these loans easier to obtain. There are requirements that must be met to obtain an FHA loan, but they are typically far more lenient than conventional loans — such as allowing credit scores as low as 580, in some scenarios.
For many borrowers, FHA loans are more expensive. But for borrowers with low credit scores and who may not be able to afford a large down payment, they can often be easier to obtain, and less expensive, than conventional loans.
No matter what loan you are considering, however, it is always best to discuss your options with multiple lenders, because they should be able to provide insight into the current state of the market. Depending on various economic conditions, there are times when the lending market is more or less favorable to those with low credit.
Ellie Mae's Origination Insight Report looks at the average FICO scores — the credit score most widely used for mortgages. In March 2017, the average FICO score for completed, closed mortgages was 721, compared to a 719 average in January 2016 and 731 in January 2015. For FHA loans, the numbers were more promising for low-credit potential homebuyers. The average FICO score for FHA purchase loans in March 2017 was 684, down from 687 in January 2016.
Judge risk vs. reward
There are, of course, negatives to buying a house with a low credit score. Even if buyers with a 650 or worse credit score do qualify for a mortgage, they will likely pay more in fees and have a higher interest rate than buyers with better scores. This is one way lenders account for the higher risk they associate with a buyer who has poor credit.
On the flip side, poor-credit borrowers who do obtain a mortgage and consistently make on-time payments should see their credit scores rise. This could make it easier to eventually refinance, should interest rates make that an affordable option.