Typically, a “bad” credit score by mortgage standards is anything below a 650 middle FICO score. However, you may still qualify for a mortgage even if your credit is less than ideal, and the good news is credit scores are not permanent.
If investing time into improving a score is out of the question, fear not. Borrowers with bad credit can get mortgage financing through programs tailored specifically for them.
Here are three loan options for those with low credit scores:
1. Conventional Loans: Minimum FICO Score Needed is 620
Conventional mortgage loans generally charge higher interest rates and fees for borrowers with low credit scores.
There isn’t a set number for income, credit score, or down payment requirements, but usually, a credit score of 620 is needed.
Lower-credit score applicants will have higher monthly payments and pay more interest over the life of the loan.
Fannie Mae and Freddie Mac are the agencies that administer most of the conventional loans in the U.S. and charge loan-level price adjustments, which are essentially adjustments to the rate.
These adjustments are based on two factors: credit score, and the ratio between the loan amount and home value (loan-to-value, or LTV). As the LTV rises and the credit score falls the fee increases.
Although conventional loans are available to lower-credit applicants, their fees often make them more expensive than FHA loans overall.
2. FHA Loans: Minimum FICO Score Needed is 500
FHA loans are backed by the Federal Housing Administration and have the lowest credit score requirements of any major home loan program.
Most lenders offer FHA loans starting at a 580 credit score and require a down payment of only 3.5%. For those with credit scores ranging from 500-579, it might still be possible to qualify but will require a minimum down payment of 10%, and it could be harder to find a lender to accept a score in this range.
Another advantage of FHA loans is that they don’t carry risk-based pricing – a fee assessed to loan applications with lower credit scores or other less-than-ideal traits. This means poor credit scores don’t necessarily mean higher interest rates, however, the borrower will have private mortgage insurance rates.
3. VA Loans: For Veteran Borrowers with FICO Scores as low as 580
VA loans are available only to military veterans, service members, and eligible spouses of military-affiliated borrowers. VA Loans are backed by the Department of Veterans Affairs and do not require a down payment, or any ongoing private mortgage insurance payments.
VA loans are also known to have the lowest interest rates on the market.
Technically there is no minimum credit score requirement for VA loans, however, most lenders favor a score of at least 580.
VA loans also don’t have risk-based pricing adjustments, which automatically makes it a very appealing mortgage option.