People who are thinking about getting a mortgage to purchase a new house, but are stuck with bad credit scores may feel like they have no chance of getting funding for that new home purchase. It may sound crazy, but you can still get a mortgage for a home purchase even if your credit score is lower than 620. However, you will face challenges that folks with higher credit scores don’t have to deal with. It all starts, however, with knowing where you stand with regards to your credit score. You can request a free credit report once a year, to see your score.
If you find that your credit score is low, here are some of the things that you need to keep in mind when you are ready to apply for a mortgage:
Options will be limited
There is only one program available for mortgage applicants with credit scores that are lower than 620 – Fannie May, Freddie Mac and the FHA have made conventional loan financing available to folks with a credit score of 620 or lower. Generally speaking, applicants need to have a minimum credit score of 600 to get a mortgage.
Income Requirements are Strict
The lower your credit score is, the more of a risk lenders take on to approve your loan. To help minimize the risks of consumers defaulting on their loans – as well as to provide a measure of self-protection – lenders require that consumers have a 43 percent debt-to-income ratio. This ratio is consistent with the CFPB’s official definition for a qualified mortgage. To make a long story short – your monthly loan payments, like car payments or credit card balances, along with the proposed mortgage payment, cannot exceed 43 percent of your total income each month.
An example would be that your mortgage payment is $2,800 each month, and you also have monthly payments on a car loan for $600 each month. In order to get a mortgage, you’d have to be earning a bit more than $7,900 to help offset the financial liabilities.
You Might Have to Complete Counseling Sessions
There are some mortgage companies that require bad credit applicants to complete online homeowner counseling sessions in order to understand all of the requirements that come along with owning a home. It doesn’t matter if you are refinancing your loan or even if you have owned a house in the past. Most of the time, these counseling classes can be done online. If your lender requires the completion of counseling sessions, get them out of the way early as a sign of good faith on your part.
Be Prepared to Pay More
You will have to pay more in fees and interest rates because of your low credit score. Lenders calculate charges based upon the perceived risk that they are taking on. Someone with a credit score of less than 620 will pay about $2,000 more in loan fees than a borrower with a score higher than 620, based on the Federal Housing Administration’s official risk based loan pricing system.
You don’t have to give up on your dreams of owning a home if your credit score is low. However, you should be prepared to face some of the challenges that we just listed for you. And don’t forget that the larger your down payment is, the better off the entire home buying experience will be. So make an effort to start saving for your next home purchase right now!