COVID-19 has reshaped the home-buying landscape, sending home prices soaring. With record-low interest rates and more people still working from home, many people want more space.
If you and your partner have hit a rough patch with your credit score, this dream might feel like it’s unattainable. However, finding a suitable mortgage with a “less than perfect” credit score is still possible.
Is there a minimum credit score for mortgages? Typically, there isn’t a minimum credit score required for mortgage applications. However, a recent blending of government policies and business practices has resulted in a credit score threshold of around 620. But some lenders may have the power to determine their own score acceptance limit. This can make it hard to find an institution where you may qualify, as each lender operates a little differently.
No matter where you are on your path to homeownership, or what your score is, here are a few tips to help you secure a mortgage.
Exercise all your options
If lenders have rejected your conventional mortgage application, there is no need to worry. There are several loan options available aside from conventional mortgages.
FHA loans: This is a loan provided by an FHA-approved lender. While there are no maximum income limits on an FHA-insured loan, they have typically been used for first-time homebuyers or low- to moderate-income borrowers. The loans are insured by the Federal Housing Administration. FHA loans require a small down payment (typically 3.5%) and will frequently accept borrowers with lower credit scores.
VA loans: For current and former members of the military, a VA loan can be a viable option for securing a home. VA loans typically don’t require any down payment. They are partially backed or guaranteed by the Department of Veterans Affairs and are frequently made available to active duty or former members of the military with lower credit scores.
USDA loans: Like FHA loans, these are frequently made to low- to moderate-income individuals with low to moderately low credit scores. However, to qualify for a USDA loan, your home must be in a USDA-designated suburban or rural location.
Work to improve your credit
If you’re not interested in utilizing a government-backed loan, such as an FHA, VA or USDA loan, another option is to improve your payment habits. Doing so will boost your credit score. Even if it takes time to raise your credit score a few points, it can still be beneficial. You can boost your score by making consistent on-time payments and finding ways to diversify your credit mix or lower your overall credit usage.
Buy within your means
Even if you have a bad credit score, lenders will perceive you as less of a risk if you stay within your means when buying a home. Lenders will likely analyze your income to obligations closely to see if you have leftover reserves every month (which they refer to as “residual income”) to help absorb the shock of unexpected expenses. Do your best to save as much as you can for a down payment. Also, be aware that private mortgage insurance can help minimize the importance of a down payment shortage.
Don’t give up
While the mortgage qualification process can be challenging, it’s essential to stay vigilant. If it looks like you’re going to get a no at first, it might just mean more work needs to be done to evaluate your situation more deeply. Many times, a no is really a “not just yet.” But with persistence, patience and passion, you can still achieve your dream of homeownership.
To learn more about what your score looks like, check out Vantage Score. The company was developed by the three national credit reporting companies—Equifax, Experian and TransUnion—to create a more advanced credit scoring solution.