If you’re reading this you might be one of the millions of American’s with a credit score below 620. I’ve spoken with dozens of clients who feel it doesn’t pay to apply because they know their credit is poor. I want to tell you it is possible to get a mortgage and a home with a credit score below 620. It comes with an extra layer of scrutiny and you have to execute it perfectly, but it is possible. But with the proper planning (and the right loan officer) you have a much better chance of getting those keys.
Acceptable Reasons For Low Credit Scores
Credit scores range from 300-850, 300 being the lowest and 850 being the highes, the lowest credit score we are able to work with is a 580 and it comes with some additional layers of questioning.
The most common (acceptable) reason for a low credit score would be medical collections, fortunately most loan programs can accept this type of debt and omit it from being a problem because they understand the nature of medical care and the expense is not something we all can easily afford.
Improving Credit Rating
Many times we see clients with lower credit ratings because they experienced some life event in the past like a divorce or illness, this even negatively influenced their rating but they’ve been improving ever since. Because credit is easy to lose and hard to regain, it can take years to regenerate a good rating. (see “tips to improve your credit rating”) We often come into peoples lives when their credit is on the upswing, your credit report can tell us when the life event happened and we can easily explain it was an isolated incident.
High Credit Card Debt
One of the more common reasons people have a lower credit rating is credit card debt. I understand that credit card debt is as American as apple pie, but it’s important to understand how a maxed out credit card can bring your credit down even if you have no late payments. (see this article: “Spend Smart, Save Money”) did you know a credit card that is over 50% of the limit can show a lack of responsibility and bring your score down? If this is the case with you it doesn’t omit you from qualifying, but it could result in a more difficult loan process. It might be smart to see if you can take some of that down payment money and pay down the card a bit.
How Does a Low Credit Score Affect My Mortgage?
If your credit score is low because of medical, credit cards or recovering credit, there is hope. FHA loans can provide buyers with financing even with low credit scores. There may be a few additional requirements, but with the right loan officer you can expect a reasonably smooth transaction.
12 Months Rental Verification
Lower credit score loans will require rental verification. It’s called a V.O.R (verification of rent) if you are not a previous homeowner the lender will send a form to your landlord to verify you have paid the last 12 months rent in full and on time. If your landlord is unable to fill this out you can provide 12 months cleared rent checks as well.
Reserves are defined as savings, the lender would like to see 1-3 months additional mortgage payments in your checking / savings or 401K after you’ve provided the down payment. This means if the down payment is $3,500 and your mortgage payment is $800, they would like to see you have $5,900 in your account. This is to ensure you have some type of financial pillow to rely on.
Lower Debt To Income Ratio
Your debt to income ratio is the percentage of your income per month your debts take up. FHA Mortgages usually allow up to a 55% ratio, but if your credit is lower they will cut that down to 50% (with compensation factors)
Compensation factors include:
1) Mortgage payment is lower than your existing rent payment
2) You have 3 months reserves (savings)
3) Your loan passes the residual income test
If you pass all 3 you can go up to 50% debt to income ratio, if you pass two you can go up to 47% and if you pass only one you can go up to 43%. So you can see how lower credit can limit what you what to purchase.
The Take Away:
It’s important to speak with a loan officer and discuss qualifying, they can navigate you through the confusing world of real estate finance and into a comfortable home loan you can afford. Please don’t feel your credit score is too low to apply, because even if it is; a good loan officer will be happy to point you in the right direction and get you on track to home ownership.
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909 . E Walnut Street
Green Bay WI 54301