Can I Get a Mortgage With Poor Credit?
Your credit profile consists of two key components: credit reports and credit scores. A credit report is an official document listing yours financial history, including factors such as past loans, credit cards, collection accounts and bankruptcies. A credit score, sometimes known as a credit rating, is a three-digit number ranging from 300 (extremely poor) to 850 (perfect). Experian, Equifax and TransUnion, the major credit bureaus, base these scores on your credit report. Whether or not you can get approved for a mortgage loan with poor credit depends on a number of factors.
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Function
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Mortgage lenders use your credit score to determine your eligibility for financing, as well as your interest rates. Specifically, lenders use six credit score "tiers" to determine a person's rates. According to a September 2010 article from Bankrate, an online finance magazine, individuals with scores of 620-639 (average credit) paid estimated interest rates of 5.661 percent, while those with scores of 760-850 (excellent credit) paid rates of 4.072 percent. Moreover, as of October 2010, most lenders automatically denied mortgages to people with credit scores below 620.
Factors
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In addition to the mortgage lenders' requirements, if you plan to pay less than 20 percent in a down payment, you must also meet private mortgage insurance (PMI) credit requirements. PMI companies' requirements are more stringent than those of mortgage lenders. As of September 2010, most PMI companies did not approve loans for people with credit scores below 680, while a few had minimum credit rating requirements of 720.
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Considerations
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Besides credit scores, lenders consider your other financial factors when making mortgage loan decisions. Lenders will consider your down payment amount and employment or income record when making approval decisions, says an October 2010 CNN Money article. Additionally, having a low debt-to-credit ratio and large cash reserves could increase your chance of getting a mortgage loan, even if you have a less-than-perfect credit score.
Alternatives
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If you have a below-average or poor credit score, you may still qualify for Federal Housing Administration (FHA) mortgage loans, provided you meet certain savings, income and debt requirements. As of September 2010 there was no minimum credit score requirement for FHA loans, but some lenders set minimum credit scores ranging from 540 to 660, with most only qualifying those with credit ratings above 620. Additionally, if you get denied for an FHA loan through an automated system, you can request manual underwriting: a process in which a mortgage underwriter reviews their loan application. Manual underwriting may increase your chances of being approved for an FHA loan.
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