June 21, 2024

4 Tips to Get a Mortgage — Even With a Lower Credit Score

It might not be the best time to buy a home (see: the average rate on a 30-year fixed-rate mortgage as of this writing, which is 6.6% according to Freddie Mac), but a lot of people are still hankering to get on the property ladder.

Your credit score is a pretty darn important part of your financial profile, but if it’s seen better days, you might be worried about your ability to qualify for a mortgage. Here are a few options for buying a home with a lower score.

1. See if you qualify for a government-backed mortgage

There are so many different types of mortgages out there, so don’t assume that a conventional mortgage is your only option. Conventional loans can be more difficult to qualify for, and they generally require a FICO® Score of at least 620. But if you’re a first-time buyer, you might be able to qualify for an FHA mortgage — these are available to you with a 3.5% down payment if your credit score is 580 or better. If it’s at least 500, you might still qualify with a 10% down payment.

If you’re active-duty military or a veteran, a VA loan might be just the ticket — and there is no official credit score requirement for these (the lenders offering them decide). Live in a qualifying rural area and have a lower income? A USDA loan could help you become a homeowner, but again, your lender sets the credit score requirement.

2. Make a larger down payment, if you can

This move is not possible for everybody, but if you have a decent income and can afford to save up a larger down payment (or can get family assistance in the form of a down payment gift), this might help. The reason mortgage lenders are more reluctant to work with buyers who have lower credit scores is because that score might indicate you are a riskier borrower — and perhaps less likely to make payments on the loan. Fair or unfair, lenders are happier to offer mortgages to those they view as less risky.

Putting more money down for a home purchase can lower your risk, because you’ll have more “skin in the game” right from the start. If you can only make a 5% down payment on a mortgage and must finance 95% of the home’s purchase price, that might make a lender sweat. Put down 20% or more? You’ll likely do everything you can to make your payments, so you’re not out the equity in the home. A higher down payment could be your ticket to mortgage approval.

3. Consider a non-qualified mortgage

Traditional mortgages have a list of buyer requirements regarding not just credit score, but also debt, income amount/type, loan terms, and more. If you can’t qualify for one based on your financial profile, another option you have is a non-qualified mortgage, or non-QM.

Non-QMs are not backed by any government agency, and have more flexible requirements, while still being about the same level of difficulty to apply for as a standard mortgage. Explore your options with a lender that specializes in bad credit (more on them below), or inquire at a local credit union (especially if you already happen to be a member in good standing).

4. Target the right mortgage lenders

Finally, it’s a good idea to lean on the power of options when you’re trying to secure a mortgage with a lower credit score. You have so many choices of lender — you can borrow from an online or local lender, different lenders focus on different mortgage types, and some even work best for first-time buyers.

The Ascent maintains a list of the best mortgage lenders for bad credit, and this is a good place to start your search. Also, talk to friends and family who’ve bought houses recently — if you can be honest about your credit score concerns, you may find someone who was in the same boat and willing to recommend the lender they worked with.

If you’re aching to buy a home and your credit score is threatening to hold you back, don’t lose hope. Consider these tips and see if homeownership is in your future.

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