How to get a Mortgage Loan With a Low Credit Score
Home ownership is a part of achieving the American dream. For many, the only thing standing between them and owning a home is a low credit score. Lenders rely heavily on FICO Scores when determining whether to fund a mortgage — low credit scores equate to high risk. Still, it isn’t impossible to get a mortgage with a low credit score.
Obtain a report from TransUnion, Experian and Equifax and find out exactly what kind of credit score you have to work with. The Fair Isaac Corporation uses the credit information obtained from these three credit bureaus to calculate a score for each bureau, ranging from 350 to 850. Lenders use the middle score to assess whether someone qualifies for a loan.
Verify that all of the information on each credit report is correct. Incorrect information on a credit report lowers the score. If there is incorrect information, send a certified letter to each credit bureau and request debt validation for the items that are disputed.
Get a mortgage broker. Different lenders require different credit scores to qualify for a mortgage. There are typically six tiers that affect who qualifies for a mortgage loan and at what interest rate. One lender may approve a mortgage with a low score of 560, while another lender might require a credit score of 620 for the same interest rate — a mortgage broker shops around to find the best deal.
Be prepared to pay higher interest rates. Many lenders cover the risk of loaning to someone with a low credit score by charging a higher interest rate. This can be costly over time, but may be necessary unless you are willing to postpone home ownership and focus on increasing your credit scores.
Put down a higher down payment — a larger down payment lowers the risk of defaulting on the mortgage loan. Thus, putting down a higher down payment makes a borrower more appealing even with a low credit score.