Can you get mortgage loan for bad credit with lower credit achieve their goals of homeownership?
These seven mortgage loan programs can help borrowers with lower credit achieve their goals of homeownership. Requirements and credit score minimums vary by program.
Mortgage loan for bad credit with lower credit
The best mortgage for you will generally be one that provides flexible qualification guidelines and allows you to comfortably afford monthly mortgage payments.
1. FHA loan: 500 credit score
FHA loans (mortgages backed by the Federal Housing Administration) have the lowest credit score requirements of any major home loan program. Most lenders offer FHA loans starting at a 580 credit score. If your score is 580 or higher, you need to put only 3.5% down.
Those with lower credit scores (500-579) may still qualify for an FHA loan. But they’d need to put at least 10% down and it’s more difficult to find a willing lender.
Another appealing quality of an FHA loan is that, unlike conventional loans, FHA-backed mortgages don’t carry risk-based pricing. This is also known as “loan-level pricing adjustments” (LLPAs). Risk-based pricing is a fee assessed to loan applications with lower credit scores or other less-than-ideal traits.
There may be some interest rate “hits” for lower-credit FHA borrowers, but they tend to be significantly less than the rate increases on conventional loans. For FHA-backed loans, this means poor credit scores don’t necessarily require higher interest rates.
Keep in mind, though, that FHA requires both an upfront and annual mortgage insurance premium (MIP) which will add to the overall cost of your loan.
2. VA loan: 580 credit score
VA loans are popular mortgage loans offered only to veterans, service members, and some eligible spouses and military-affiliated borrowers. With backing from the Department of Veterans Affairs, these loans do not require a down payment or any ongoing mortgage insurance payments. (Although there is a one-time funding fee which most borrowers roll into the loan amount.)
VA loans also typically have the lowest interest rates on the market.
Technically, there’s no minimum credit score requirement for a VA loan. However, most lenders impose a minimum score of at least 580. And many start at 620.
Similar to FHA loans, VA loans don’t have risk-based pricing adjustments. Applicants with low scores can often get rates similar to those for high-credit borrowers.
3. USDA loan: 640 credit score
USDA loans are popular for their zero down payment requirement and low rates. You typically need a 640 FICO score to qualify for this type of mortgage, though minimum credit score requirements can vary by lender.
These mortgages are backed by the U.S. Department of Agriculture with the goal of increasing homeownership in rural areas. To submit a mortgage application for this type of loan, the home you’re buying must be located in a qualifying “rural” area — though some suburbs make the cut.
A USDA loan also won’t work if you make too much money. Your household income can’t be more than 115 percent of the median household income in your area.
4. Conventional loan: 620 credit score
Non-government conventional mortgage loans charge higher interest rates and fees for borrowers with low credit scores.
Fannie Mae and Freddie Mac, the agencies that administer most of the conventional loans in the U.S., charge loan-level price adjustments, or LLPAs. These fees are based on two loan factors:
Loan-to-value (LTV): LTV is the ratio between the loan amount and home value
As your LTV rises and your credit score falls, your fee goes up. For instance, a borrower with 20% down and a 700 credit score will pay 1.25% of the loan amount in LLPAs. But an applicant with a 640 score and 10% down will be charged a fee of 2.75 percent.
These fees translate to higher interest rates for borrowers. That means lower-credit score applicants will have higher monthly mortgage payments and will pay more interest over the life of the loan.
The majority of lenders require homeowners to have a minimum credit score of 620 for a conventional loan. But while that threshold is pretty low, the additional fees charged for poor credit often mean FHA loans are more affordable for bad-credit borrowers.
5. Fannie Mae HomeReady: 620 credit score
Released in December 2015, HomeReady is an important Fannie Mae loan program for low- to moderate-income borrowers, with expanded eligibility for financing homes in low-income communities.
HomeReady requires only 3% down and a 620 credit score. And the rates it charges for private mortgage insurance (PMI) are cheaper than for standard conventional loans. Unlike Freddie’s Home Possible program, you don’t have to be a first-time homebuyer to qualify for HomeReady.
6. Freddie Mac Home Possible: 660 credit score
Freddie Mac’s first-time home buyer program, Home Possible, is helping buyers get into homes with a very low down payment and moderate credit.
Home Possible is available for low and moderate-income borrowers with a down payment of just 3 percent. And, for borrowers who can’t save up the down payment, Home Possible allows a variety of down payment assistance programs.
To qualify for the Home Possible loan with reduced PMI rates, most lenders will require a 660 or better credit score.
7. Non-qualified mortgage (Non-QM): 500 credit score
The qualified mortgage rule, also known as the “QM Rule,” went into effect in 2014. The federal government set the QM Rule to create safer loans by prohibiting or limiting high-risk mortgage products. This rule is the reason most loans require a minimum credit score in the 600s as well as a down payment and/or private mortgage insurance.
But there are still some “non-QM” loans available with more flexible rules. Banks don’t sell these mortgages to investors, so they’re free to set their own criteria — like lower minimum credit score requirements.
Some non-QM loans can be found with credit scores as low as 500. But like with an FHA loan, you’re much more likely to find a lender who will approve you with a FICO score of 580 or higher.
The downside is that non-QM loans usually have significantly higher rates than conforming mortgages. So if your credit score is a little too low for a mainstream home loan, it might be worth waiting to buy until you can raise your credit score and lower your borrowing costs.
If you’re interested in a non-QM loan, check out the specialty mortgage programs some banks and credit unions offer that are neither conventional loans nor government-backed. Or, work with a mortgage broker who can recommend products from various lenders that might fit your needs.
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