Believe it or not, your credit does not have to be very high to get a mortgage. Many banks and lenders will provide mortgage loans to applicants with at least 640 credit points. However, not all lenders are the same – and even if you can get a mortgage, a bad credit will seriously cost you interest.
What credit rating do I need to get a mortgage in 2017?
There are two main types of mortgages: ordinary and Federal housing administration, or FHA, loans.
Some lenders will offer ordinary mortgage loans to consumers with a credit score of only 620. Other lenders will go even lower, but the process of obtaining this mortgage will be difficult and will require a thorough explanation of your credit history.
For FHA loans, some lenders will go as low as 580, with just 3.5% in equity. However, some people can get a new mortgage or even refinance with a credit score of up to 550 – but there is one snag. You will need at least 10% equity. This means that you need 10% down when buying a home or 10% equity when refinancing.
Keep in mind, however, not all lenders will extend a mortgage for someone with a bad credit score – this is due to their tolerance for risk. (From an underwriting perspective, a bad credit indicates a higher default risk.) The greater the risk that the bank is willing to take on, the higher your chances of getting approval with a not very hot score. You can see where you are right now by viewing two free credit ratings on Credit.com.
Here are some things to keep in mind if you have a low credit rating and buying for a mortgage.
A good idea to rebuild your credit
If you want to increase your credit rating to make it easier to get a mortgage, you will need to remove the 620 mark to see any significant difference. Going to this threshold (and beyond) is likely to make mortgage rates more favorable and the conditions that are available to you, and also prevent you from going through the type of control often required for a low-level credit score. Typically, you can improve your credit rating by challenging errors in your credit report, paying out high balances on credit cards and getting any delinquent accounts with a good reputation.
Advance payment will be difficult
At present, assistance programs in the form of advance payments are very scarce. In addition, in order to be eligible for advance payment assistance, the borrower will typically need at least 640 credit points. You can count on this with most banks and lenders. It’s reasonable to assume that you do not have the right to help if your credit rating is less than 640.
Previous short sales, bankruptcy or foreclosure are subject to “seasoning periods”
If you have one of these elements in your credit report, this will affect your ability to get a mortgage. Typically, a three-year waiting period – also known as the “seasoning season” – before you can claim a mortgage after you have gone through foreclosure or short sale. The waiting time after bankruptcy is two years. Note: There are some lending programs that have shorter seasoning periods. For example, VA loans can be approved for a two-year period after the repurchase.
Higher debt-to-income ratios make it more difficult
It’s no secret that FHA loans allow a ratio of debt to income ratio of over 54%. To qualify for this type of financing, your credit rating should be about 640 or higher. This does not mean that your 620 credit rating, for example, will not work. This is almost a guarantee that if your credit rating is less than 600, it will be difficult for you to get a loan approved with a debt-to-income ratio exceeding 45%.
Cash withdrawal – refinancing on the table
This is a big problem. If you already have your own home, you can use your capital to improve your credit. How? You can make refinancing from your home. This will allow you to pay off installment loans and credit cards, which often have a much higher interest rate than any mortgage loan. Including them in the payment can ultimately save considerable money, and this is still an option for borrowers with a lower credit rating. (As I mentioned earlier, some lenders will refinance for borrowers with a credit score of up to 550 if they are in at least 10% equity position.) However, if this is what you are thinking about, read the printout and determine if you will You go forward. The repayment of funds again requires that you pay the final costs, and your bad credit could not earn a low enough interest rate to make this step worthwhile. You also want to make sure that a new monthly payment for a mortgage is something that you can handle.
Remember, just because you can technically get a mortgage with a bad credit does not mean that this is the best step for you. You may want to improve your position, reduce the debt-to-income ratio and strengthen your down payment funds before entering the housing market. However, this can be done, and if you are currently looking for a home loan, be sure to ask potential lenders or mortgage brokers a lot of questions to find the best offer that you can get.