Qualifying for a mortgage loan is always a complicated process -- but if you have a low credit score, the challenge is even higher. Mortgage lenders look carefully at your three-digit credit score, a number that tells them instantly whether you have a history of paying your bills late or not at all. Most lenders today consider FICO credit scores of 740 or higher to be good ones. If your score is too much lower than that, you'll need to convince lenders that you have a high enough income to outweigh your past financial mistakes. You'll also have to be willing to pay higher interest rates and come up with a larger down payment.
Call several mortgage lenders to shop around for the best interest rates and fees. You can work with any mortgage lender licensed to do business in your state. The more of these lenders you call, the more likely you'll be to find one willing to work with you despite your low credit score.
Fill out the Uniform Residential Loan Application to start the lending process once you find a lender that agrees to give you a chance to apply for a loan despite your weak credit. To complete this form, you'll have to provide basic information such as your address, full name and Social Security number. You'll also have to list where you work, your job title, your salary and your monthly debt obligations.
Copy such financial papers as your last two paycheck stubs, last two years' worth of income-tax returns and two most recent savings and checking account statements. Send these copies along with your loan application to your lender. Your lender will use these to verify your income and debts to ensure that you can afford a mortgage payment.
Include as many income streams as possible to make yourself a more attractive borrower. Lenders don't only consider your salary when determining your gross monthly income. They'll also count rental income from tenants, alimony checks, royalties and money from legal settlements as part of your income. The more money you make each month, the more likely you are to convince a mortgage lender to take a chance on you.
Give your lender permission to run your credit. This will give your lender access to your credit score. The lower the score, the higher the interest rate your lender will charge. This can help make up for the extra risk a lender takes for loaning mortgage money to someone with a history of missed payments. If your score is too low -- under 620 for many lenders -- your lender might refuse your request for a mortgage loan.
Consider applying for a loan insured by the Federal Housing Administration if your credit score is low. FHA loans are available to borrowers with credit scores as low as 500 on the FICO scale. These loans also come with lower down payment requirements. If your score is at least 580, you'll need a down payment of just 3.5 percent of your home's final purchase price. If your score is under 580 but 500 or higher, you'll need a down payment of 10 percent of your home's purchase price. However, just because the FHA will insure loans with such low credit scores doesn't mean that the lenders who originate these loans have to approve you if your score is low. Many lenders are still unwilling to take a chance on borrowers with credit scores under 580, even if they're applying for an FHA-insured loan.
Make yourself a more attractive borrower by putting down a larger down payment. Though most lenders require minimum down payments in the 5 percent range, you'll increase your odds of qualifying for a loan if you put down more than that. The greater your down payment, the less risk your lender is taking on. Lenders consider borrowers less likely to default on their mortgage payments if they've already invested a large amount of money in their residences. A larger down payment would represent this larger investment.
Rebuild your credit by forging a new history of paying all your bills on time if you can't receive a mortgage loan because your credit scores are so low. Paying down your credit-card debt will also boost your credit score. This takes time, though. It can take years to build a healthy credit score depending upon how low that score has fallen.
- Realtor.com: Can You Buy a Home With Bad Credit?
- Bankrate: Good Credit Score Not Good Enough Anymore
- myFICO. “What's in my FICO® Scores?” Accessed May 12, 2020.
- Federal Reserve Bank of St. Louis. “Did Credit Scores Predict the Subprime Crisis?” Accessed May 12, 2020.
- Experian. “What Credit Score Do I Need to Get a Mortgage?” Accessed May 12, 2020.
- myFICO. “What is a Credit Score?” Accessed May 12, 2020.
- U.S. Department of Housing and Urban Development. “THE FEDERAL HOUSING ADMINISTRATION (FHA).” Accessed May 12, 2020.
- Universal Credit Services. “Tri-Merge Credit Reports.” Accessed May 12, 2020.
- Newcastle Loans. “How credit scores affect your mortgage rate and approval.” Accessed May 12, 2020.
- United States Federal Trade Commission. “Free Credit Reports.” Accessed May 12, 2020.
- Bank of America. “Get your FICO® Score for free in Online and Mobile Banking.” Accessed May 12, 2020.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.