What to Do If Your Credit Score Is Too Low For a Mortgage

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By Abby Hayes

If you're preparing to buy a home, you probably know that your credit score is important. Maybe you've already been turned down for a mortgage because of a low credit score. Or maybe you've recently pulled your credit report, only to realize that your credit is worse than you expected.

Don't give up on buying a home yet! There are plenty of places to turn if your credit is too low to get a conventional mortgage. But first, you should figure out what lenders expect of your credit score, since you might be surprised to find that you can indeed buy a home with your current credit score.

What do conventional lenders expect?

Lending requirements vary from one lender to the next, but they've generally become more strict since the subprime mortgage lending crisis in 2008. As a rule of thumb, though, you'll need a FICO score of about 650 to get a conventional mortgage –- and that's on the low end.

Remember, the lower your credit score, the higher your mortgage's interest rate is likely to be. This can have a dramatic effect on how much you pay for your home over time. So if you're sitting on the mid-to-low end of the credit spectrum, you may want to look into some of these options, even if you qualify for a conventional mortgage.

Put More Money Down

Mortgage lenders look at a host of factors when deciding whether or not to lend you money. One of those factors is your credit score. But another factor is your down payment.

With some lenders, you may be able to offset a weak credit score with a higher down payment. With a bigger down payment, you'll have more equity in your home, which means the lender takes less of a risk when lending to you.

If you've got a substantial amount of money in savings, but still have a fairly low credit score, consider applying for a mortgage with a smaller bank or credit union. %VIRTUAL-article-sponsoredlinks%Often, these smaller entities operate under more flexible lending guidelines, so you can talk to a loan officer about your situation and maybe get a favorable result.

Research Non-Conventional Loans

Another option if you have a low credit score (and especially if you combine a low credit score and a small down payment) is to look into non-conventional loans. Non-conventional or non-conforming loans, such as the Federal Housing Administration loan, Veterans Affairs loan and U.S. Department of Agriculture loan, often have less stringent lending requirements.

For instance, you may be able to get a FHA loan with a credit score of just 580, as long as you can put 3.5 percent down. With a higher down payment of 10 percent, you may be able to get an FHA loan with even lower credit.

One other option is to talk with banks in your area about specialized lending programs. Some banks offer programs for lower-income, lower-credit homebuyers, which could lift credit restrictions enough for you to qualify.

Work With a Homeownership Counselor

There are some local and national nonprofits that offer homeownership counseling such as HomeFree-USA and HOPE NOW.

Nonprofits like these offer counseling to future homebuyers who need help raising their credit scores or navigating the homebuying process. It may take some time, but with the help of a credit and housing counselor, you can learn which steps to take to raise your credit score and apply for a home loan.

Get Your Credit Score Up

You could also simply take the time to bootstrap yourself into a better credit score. Raising your score isn't complicated, but it does take time, discipline and hard work. These steps can help get your credit score up so that you can qualify for a mortgage:
  1. Correct any errors on your report, especially late payments or collections accounts that aren't recorded properly.
  2. Make all your payments on time. Late payments are the No. 1 way to ding your credit score.
  3. Pay down revolving debt like credit cards. A high debt-to-credit ratio is another surefire way to lower your score.
  4. Wait it out. As long as you're paying down debt and making payments on time, your credit score will eventually rise on its own.
Even if you decide to apply for a non-conventional loan or put more money down on your home, these are good credit health habits to start for a lifetime.

Abby Hayes is a freelance blogger and journalist who writes for personal finance blog The Dough Roller and contributes to Dough Roller's weekly newsletter.


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What to Do If Your Credit Score Is Too Low For a Mortgage
Check your credit reports and correct errors. Of course, you want to make sure that everything is being accurately reported, from your current address to your closed accounts. (For more guidance on how to dispute an error on your credit report, look to this guide from the Federal Trade Commission.)

But you also want to check the details about what is being reported about your current accounts. For example, it can make a big difference to your score if your credit limit for a card is understated. Imagine that you owe $5,000 and your limit is $15,000. That means you owe 33 percent of your limit. If your credit limit is incorrectly listed as $8,000, though, it will look like you've borrowed 63 percent of your limit.
When you fix errors or take actions that should boost your score, make sure that all three of the main credit-reporting agencies (Equifax, Experian and TransUnion) know about it. By law, you can get a free copy of your credit report from each of them once a year -- do so, in order to spot errors and find other score-boosting opportunities.
One gambit few people think of is simply asking for what you want. In order to help you pay down your debt more quickly, you might ask your lender to lower your interest rate. If the lender refuses, see if you can find a lower-rate card and transfer the debt.

If you've got one or two glaring late payments on your credit record, you might ask your lender if they could be erased, in what's called a "goodwill deletion." Lenders are likely to be especially responsive to their best customers. And if you're dealing with a collection agency over some debt, see whether they'll delete it from your record if you pay it off. That can be well worth it.
If you're planning on closing some of your accounts, think twice. It's often a sensible thing to do to simplify your financial life, but closing an account can actually ding your credit score. One reason is that it actually reduces your available credit. Oddly enough, a host of seemingly sensible moves can hurt you -- such as using just one card for most of your charges. Even if you prefer using a newer card, keep older accounts open and use them occasionally to keep them active. Over time, that will give you a longer history and help improve that part of the credit score calculation.
Opening multiple accounts in a short period of time may boost your available credit, but it sends the wrong message to potential creditors, as it makes you look desperate to get credit from any available source.
Here's a valuable tip for anyone selling a home for less than they owe on it: What you're looking at is called a "short sale," and if you end up owing many thousands of dollars to your mortgage lender, you might get it in writing before the sale closes that the debt won't go on your record. Ending up with a big balance owed can be a black mark on your record, reportedly as costly as a foreclosure.

If a high credit score is important to you -- and for most of us it should be -- always consider how your financial actions will affect your score. For more information on credit scores, be sure to look at this guide from myFICO.com, which is the consumer division of the company that is responsible for the popular FICO credit score.
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