What Are Your Home Financing Options When You Have a Lower Credit Score?

Posted by Laine Smith on 3/15/17 9:05 AM

Topics: FHA Loans Credit Score First Time Home Buyer USDA Loans Loan Types home buying Mortgage Goals

Credit scores are a huge part of the loan approval process. They not only determine your eligibility for home financing but can also determine what mortgage rate you will qualify for. But what if your credit score falls on the lower side of the spectrum?

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A 2015 Wells Fargo study found that two-thirds of Americans believe they need a very good credit score to buy a home, with nearly half of those respondents thinking a “good” credit score is over 780. In the mortgage world, a score over 780 is considered “excellent” or “top tier” while scores over 660 are considered “good”.

While a higher credit score indicates that you are a responsible borrower, credit score requirements vary amongst mortgage programs. Here are a few home loan options that may fit the needs of a homebuyer with less than perfect credit or limited credit history.

USDA Rural Development Loan

The United States Department of Agriculture partners with approved local lenders, like Compass Mortgage, to extend 100% financing to eligible borrowers. The USDA Rural Development Guaranteed Housing Loan, also known as a USDA or Rural Development Loan, was designed to help individuals and families achieve homeownership in rural areas across the United States by providing:

  • No down payment requirements
  • Lower-than-market interest rates
  • Ability to finance upfront private mortgage insurance (PMI) into the loan
  • Low monthly PMI rate
  • Flexible credit guidelines and some non-traditional credit histories acceptable for borrowers with limited credit history

Credit score, maximum loan amounts, debt-to-income ratios, income, and location restrictions apply. To learn more about USDA Rural Development eligibility, click here.

FHA

The FHA is the largest insurer on mortgages in the world and typically one of the easiest types of loans to acquire. Though repeat homebuyers can finance with an FHA loan, it is commonly referred to as a “first-time homebuyer loan”, because of the many ways it benefits first-time buyers, including:

  • Flexible credit guidelines
  • Small down payment requirement of 3.5%, which can be gifted from a family member or a grant from a state or local government down payment assistance program
  • Across-the-board interest rate often lower than market rates
  • Lowered mortgage insurance premiums

Compass Mortgage has the ability to finance FHA loans with credit scores as low as 560. To learn more about FHA financing eligibility, click here.

HomeReady

Fannie Mae’s HomeReady mortgage program was rolled out in early 2016 with the goal to make home financing accessible to creditworthy low to moderate-income homebuyers. HomeReady does so by allowing:

  • The use of extended-household member incomes
  • A low down payment requirement of 3%
  • Flexible credit guidelines with the ability to use non-traditional credit
  • Non-occupant borrowers

To learn more about the HomeReady program, click here.

What if my credit score is still too low?

Building mortgage-ready credit takes time, but in some instances, a certain credit action can quickly bring your score up to financing standards. Meeting with a mortgage banker for a pre-approval can help you determine what your course of action should be.

If your score is just shy of mortgage requirements, a rapid rescore may be a good route for you. A rapid rescore allows your lender to run a simulation to estimate how much your credit score could improve by taking certain actions, such as paying down a balance on a credit card. After you’ve completed the suggested steps, your credit report, and therefore credit score, is updated within a matter of days.

If that process isn’t beneficial for you, improving your score can be achieved by:

  • Paying down high-balance credit cards
  • Abstaining from opening new lines of credit
  • Continuing to pay bills on time

Overall, if you’re not sure whether your credit score meets the requirements for a mortgage, talking to a mortgage banker should be your first step. Don’t rely on free online credit score services to depict your score. Mortgage lenders use the median of your three scores from Experian, Equifax and TransUnion to represent your credit score for financing. When you use an online credit check, you are likely being shown only one of your three scores and could be misled to think your represented score is too low for mortgage qualification.

To learn more about your loan options and their credit score requirements, download our free Mortgage 101 Handbook, a great guide for first-time homebuyers.

Download: Mortgage 101 Handbook

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