How to Get a Home Loan With Less-Than-Stellar Credit
You can still become a homeowner, but you may have to go through the back door to do so.
In a perfect world, you’d have a robust credit score and a 20 percent down payment in hand, with mortgage lenders falling all over themselves to get your attention.
But what if your world is a little dinged? What if your credit score is shabby, your bank manager cringes when he sees you and debt collectors are the ones vying for your attention?
You may be better positioned to buy a house than you think. "As a rule of thumb, a credit score of at least 650 gives you a chance at qualifying for a conventional loan," says Max Galka, co-founder and CEO of Revaluate.com, a New York apartment history and review website.
But even if your credit score is lower than 650, you aren't out of the house-buying game yet. Not by a long shot.
There has been a false narrative circulating ever since the meltdown of 2008 – that even though interest rates are great, almost nobody can qualify, since the banks pick only the most squeaky-clean borrowers," says Joe Parsons, a managing partner at PFS Funding, a mortgage lender in Dublin, California. "This is so far from the truth as to be almost ludicrous, except that it becomes a sort of self-fulfilling prophecy, where imperfect would-be buyers stay out of the market for fear of rejection."
So if you fear that your basement-level credit score will prevent you from ever having a basement of your own, here are some of your options:
Try getting your house through a Federal Housing Administration loan. If you can't get a conventional mortgage through a mortgage lender, this is the most typical, logical path for a prospective homeowner with bad credit. These are loans offered through lenders approved by the FHA, a government agency within the U.S. Department of Housing and Urban Development, or HUD. You can likely get approved for an FHA loan with a credit score of as low as 580, provided you have enough money saved for a 3.5 percent down payment. If you have an even lower credit score, that doesn't mean you're out on the street. According to HUD's website, your credit score can be as low as 500 – if you can furnish a 10 percent down payment.
"HUD has upfront and monthly mortgage insurance," says Yael Ishakis, vice president of First Meridian Mortgage in Brooklyn, New York, and author of "The Complete Guide to Buying a Home."
She adds: "The rates are low, and the program is solid. So my opinion is to go ahead, get your home and slowly fix up your credit; and when that time comes, refinance."
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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.