Think you cannot qualify for a mortgage with a low credit score? Think again you certainly can. Think your rate will automatically be the worst possible with a low credit or Fico Score? Think again. While a low credit score will not net you the best interest rates it does not automatically mean you are stuck with the worst possible rate. While a low credit score can prevent some people from even getting a mortgage it is not the only factor that comes into play as with mortgages there are factors beyond credit scores which lenders look at.
A FICO score of about 500 to 520 is usually the minimum which will qualify for a mortgage. If your score is that low however you will need to have a few other things going for you that can offset your rather low credit score. Do not assume that you cannot get a mortgage just due to a credit score on the low end. Nor should you limit your lender search to creditors who specialize in mortgages for people with poor credit. Lets examine some of the other factors that affect mortgages that I spoke about.
Large down payment:
There is a rule in the mortgage industry called the 30/70 rule. This rule states that if a borrower places down 30% of the homes value as a down payment they are less likely to default on their loan due to sinking so much into the property at the offset. A large down payment can there for help to offset a low credit score when it comes to obtaining a mortgage.
Low debt to income ratio:
If you do not have much debt you are not as risky. People can have low credit scores for a variety of reasons including being new to credit. Perhaps 6 years ago you had some charge offs and you made good on the debt and paid it off recently so your credit score is on the low side but self repairing with the passage of time. As long as you are not paying out a lot each month to debt you will look much better on your mortgage application. If you keep your debt to income ratio under 41 to 43% and provide full documentation of your income and assets you should be able to qualify for a mortgage with a credit score as low as 520.
Low credit score due to unemployment or losing your home:
The failing economy hurt a lot of good people who prior to the recession had paid all their bills on time, worked full time and had their own home and the mortgage was in the black. These people who got hit hard by the recession lost points on their credit score due to personal financial hardship rather than their own mismanagement and bad habits. For these people they may qualify for FHA’s “Back to Work” program. This program helps fast track people for a home loan more quickly following financial disaster related to the recession.
If you are worried if you will qualify for a mortgage the best advice is to try. You should never pay a mortgage fee or application fee for applying, most lenders will do this as a customer service. Just remember a low score does not automatically bar you from a mortgage. You can also work on improving your credit score over time while saving for a bigger down payment.