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Most people think that you need good credit to buy a house. But that’s really only true for traditional, fixed-rate mortgages. If you want a 15-year or 30-year fixed rate mortgage, then you generally need a FICO score of at least 620 or above. More high-end lending tools, like balloon mortgages and jumbo mortgages, generally require even better credit.
However, on the other end of the spectrum, there are loans specifically designed to help bad credit homebuyers achieve homeownership. You can use lending tools, like adjustable rate mortgages, to buy a home with a lower credit score. This is especially true if you are a first-time homebuyer. In this case, you can qualify for home loans with a FICO score as low as 560.
|Type of Mortgage||Credit Score Needed|
|Traditional, fixed-rate home loan||620 and above|
|Adjustable rate mortgage (ARM)||Above 600|
In general, FHA loans only require a FICO score of 560 or more. That’s considered a “poor” FICO score. In addition to allowing you to qualify for loans with weak credit, a homebuyer course completion certificate can also help you qualify for first-time homebuyer assistance programs, such as down payment and closing cost assistance.
Anytime someone puts down less than 20% on the purchase of a home, the lender will add Private Mortgage Insurance (PMI). This is basically extra money added to your monthly mortgage payment. You pay until you’ve paid off 20% of the home’s value; then PMI drops off and your payments will be reduced.
If you still can’t qualify, even for an FHA loan, then you need to take steps to make yourself more “creditworthy.” This means taking steps to improve your credit score and decrease your debt-to-income ratio. And, if your FICO score is below 550, it may take as little as six months or less to get where you need to be.
Often, it’s good to have a tool that tells you where you stand. Credit monitoring and ID protect tools give you access to your three credit reports, plus credit score tracking. This can make it easier to know where your score is, so you know exactly when it’s the right time to apply for a mortgage.
Some lenders have also relaxed down payment requirements. If you buy a Fannie Mae backed home, new rules started in 2017 allow you to buy a home with as little as 5% down. Again, you must pay PMI until you’ve paid off another 15% of the mortgage, but it drops off. You can also qualify with a higher debt to income ratio. The previous cut off was 41% or less. Now you can qualify as long as your DTI is between 45% and 50%.
You should also be able to get a better interest rate with a good credit score. The higher your score, the lower the rate. That means lower interest charges over the life of your mortgage; you essentially pay less to borrow than someone with bad credit.
If you qualified for an FHA loan at a 560 FICO, then a few years down the road your credit score has improved to 700, consider refinancing! You are likely to qualify for a lower interest rate, which could also lower your monthly payments. Just be aware that other factors affect mortgage rates, such as prime rate changes by the Federal Reserve.
If you’re in doubt, ask a lender for a quote or use an online quote comparison tool to get several quotes. This will help you judge where rates are and what you can qualify for now that your score is higher.
Published by Debt.com, LLC