Can I Get A Mortgage If My Credit Score Is Poor?

A poor credit score can make getting approved for a mortgage more challenging, but it is often still possible with the right preparation and approach. While lenders generally prefer borrowers with credit scores of at least 620 or higher, there are options for those with lower scores if you take steps to improve your financial profile.

What is Considered a Poor Credit Score?

Credit scores range from 300 to 850, with higher scores indicating better credit health. Here’s how the scores typically break down:

• 800-850: Exceptional
• 740-799: Very Good
• 670-739: Good
• 580-669: Fair
• 500-579: Poor
• 300-499: Very Poor

Scores below 580 are generally considered poor by most lenders. The lower your score the harder it will be to get approved for a competitive mortgage.

Why Lenders View Low Credit Scores as Risky

When reviewing a mortgage application lenders examine your credit report and score to estimate the risk of lending to you. Several factors feed into your score including

• Payment history – Have you paid past debts on time? Late payments can lower your score.
• Credit utilization – What percentage of your available credit are you using? High utilization can indicate risk.
• Credit history length – How long have you managed credit accounts? A short history may be seen as riskier.
• New credit – Opening a lot of new accounts can lower your score.
• Credit mix – Having different types of credit (credit cards, loans, etc) indicates responsible use.

In general people with lower credit scores are seen as riskier borrowers more likely to miss mortgage payments or even default. By requiring decent credit, lenders try to mitigate that risk.

Minimum Credit Scores for Mortgages

The minimum credit score depends on the type of mortgage you apply for:

• Conventional loans – Require a minimum score of 620-660. Conventional mortgages meet conforming loan limits and are not backed by the government.

• FHA loans – Require a minimum score of 580 with a down payment of at least 3.5%, or 500 with a down payment of at least 10%. FHA loans are insured by the Federal Housing Administration.

• VA loans – Have no explicit minimum credit score, but lenders often require at least 620. VA loans are guaranteed by the U.S. Department of Veterans Affairs.

• USDA loans – Also have no defined minimum score, but a minimum of 640 is common. USDA loans are backed by the U.S. Department of Agriculture for rural properties.

While it may be possible to get a mortgage with a score as low as 500, you will pay higher interest rates and fees to compensate the lender for the extra risk.

Improving Your Credit Score

Before applying for a mortgage, work on improving your credit profile to boost your chances of approval and get better rates. Here are some tips:

• Check credit reports – Review your credit reports from Equifax, Experian and TransUnion for any errors dragging down your score. Dispute any inaccuracies with the bureaus.

• Pay down debts – Lower credit card balances and other debts to reduce your credit utilization ratio. This can significantly lift your score.

• Make payments on time – Set up autopay or payment reminders to avoid missed payments that negatively impact your score.

• Limit credit inquiries – Each application for new credit results in a hard inquiry that can slightly lower your score for a period. Apply conservatively.

• Become an authorized user – You can piggyback off someone else’s good credit if they add you as an authorized user on their credit card. Their payment history will be added to your report.

• Use credit builder loans – These loans function like secured credit cards to help demonstrate responsible use of credit and build your score.

With diligence and patience over 6 months to a year, it is possible to raise your credit score significantly to improve your mortgage eligibility.

Tips for Getting a Mortgage with Poor Credit

If improving your credit score before applying for a mortgage isn’t feasible, here are some options that can still make homeownership possible:

• Make a larger down payment – Putting down 20% or more shows lenders you’re financially stable and lowers their risk. This can help compensate for a low score.

• Find a co-signer with good credit – Adding a co-signer with better credit makes the loan less risky for lenders and may help you qualify and get better rates.

• Work with lenders specializing in bad credit – Some lenders focus specifically on borrowers with past credit challenges. They may offer more flexible underwriting.

• Consider adjustable rate mortgages – ARMs with lower initial rates can sometimes be easier to qualify for. Just be mindful of the risks when rates adjust upwards.

• Look for alternative lenders – Online lenders, credit unions, and community banks may offer more mortgage options than major banks for borrowers with low credit scores.

• Improve other aspects of your application – A stable income, significant assets, and a low debt-to-income ratio can help offset a poor credit score during mortgage underwriting.

While a poor credit score makes getting a mortgage more difficult, owning a home is still possible with preparation and persistence. Improving your credit health in the months leading up to your home purchase can unlock better mortgage terms and save you significantly over the life of your loan.