Mortgage

Get A Home With A Low Credit Score: It's Easier Than You Think

Phoebe Berline
Get A Home With A Low Credit Score: It's Easier Than You Think
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You might think that the dream of home ownership is out of reach, if you’ve got a low credit score. But with the right strategy and tools, you can make it happen. If you’ve got a 620 FICO Score, here’s a step-by-step guide on how to lock in on a mortgage.

Step 1: Look into an FHA vs. a Conventional Loan

Most people assume that buying a home and getting a mortgage, means having a large 20% down payment and great credit. But that’s not always the case.

That’s because there are two different types of mortgages: Conventional vs. FHA mortgages.

What is an FHA Loan?

FHA stands for the Federal Housing Administration, a Government agency created in 1934 by HUD, the U.S. Department of Housing and Urban Development to increase homeownership in America. The FHA insures loans offered by private lenders, and do not offer mortgage loans directly.

Federal Housing Administration or “FHA” loans are different from conventional mortgages. FHA loans have the lowest minimum credit score requirements of any mortgage programs around.

Why does an FHA loan offer more flexible credit qualifying guidelines than other loan type? This is due to the fact that the Federal Housing Administration (FHA) insures this type of loan.

Because the government is backing the FHA loan, a lender is able to offer a competitive interest rate. A low interest rate can really help you (the borrower) save a lot of money.

3 FHA Loan Key Facts:

Lower credit score requirements - Conventional loans usually have a 640 credit score minimum requirement. But borrowers with a credit score between 500-579 can still qualify for an FHA loan, as long as they put down a required minimum down payment of 10%.

Lower down payment requirements - If a borrower has a minimum 580 credit score the FHA will insure the loan with a 3.5% down payment. In addition to having lower FICO score requirements, down payments work differently. An FHA mortgage requires just a 3.5% down payment, which is much lower than the 5%-20% down needed for a conventional loan.

Requires Mortgage Insurance - Borrowers are required to pay mortgage insurance premiums (MIPs) monthly, usually around 0.85 percent of the loan amount annually. (Conventional loans do not require mortgage insurance if a borrower puts 20% down).

If you’ve got a 630 FICO score getting approved for a loan is not easy, but with an FHA loan it is doable.

Step 2: Arm Yourself with the Facts

A down payment can be the biggest hurdle for a first-time buyer.

But did you know a down payment for an FHA loan, can be a gift?

FHA loan down payments work a little differently. An FHA loan down payment does not necessarily have to come from the borrower’s pocket. The money is allowed to come from a family member. So for example, a first time homebuyer could

A Clean Credit Report Matters

The requirements necessary for obtaining an FHA loan are relatively simple. You do not need to have a high or perfect credit score to get an FHA loan.

But it is vital that you check your credit report. Making sure your credit profile is clean, will improve your chances of being approved for an FHA loan.

In other words, underwriting is simpler and having a 620 FICO score is not necessarily a deal breaker. But if you have less than perfect credit, than it’s in your best interest to make sure your credit report is clear. Having a payment history with no collections or late payments in the past twelve months, and a low debt-to-income ratio will help your application.

How To Improve Your Credit Score, Before a Mortgage:

Check your credit report – Before you apply for a mortgage you should pull a copy of your credit report and scores. Its free and easy to do this with services like Credit Sesame. If you spot any errors, you’ll need to dispute those with the credit bureaus (all three credit bureaus) before applying for a mortgage.

Pay down credit card debt – Pay down your credit card balances to less than 20% to maximize your credit score.

Do not apply for new credit – New loan account and credit inquiries will lower your credit score. So if you’re planning on getting a mortgage loan in the near future you’ll want to hold off on applying for new credit cards.

Key FHA Loan Facts, that you’ll also want to be aware of include:

Low Minimum Down Payment – only a 3.5% down payment is required for approval.

A Down Payment Can Be a Gift – the down payment doesn’t necessarily have to come from your pocket. The money is allowed to come from a family member or employer.

More Flexible Credit Qualifying Guidelines - FHA guidelines state you only need a 580 credit score to qualify for an FHA loan, where a conventional loan will require at least 620.

No Borrower Income Limit – in the case of FHA loans, there is no income limit (you do not have to be in the low-income to middle income bracket)

Mortgage Insurance Premiums (MIPs) – as a potential downside, the mortgage insurance premium is collected in monthly installments, in most cases for the life of the loan.

Step 3: Get the Best FHA-Approved Lender to Meet Your Needs

Finally, you’ll need to do your homework, and pick the right top FHA-Approved lender, that can work with you. Many traditional mortgage lenders require paychecks and verifiable income to undergo an underwriting process.

But today some FHA-approved lenders also specialize in helping clients get qualified with a non-traditional income validation.

For example, FHA-approved lender New American Funding can take you from A to Z to guide you through the process of getting an FHA loan. Named Nerd-Wallet’s Best Mortgage Lender for FHA Loans, New American Funding also has an A+ rating from the Better Business Bureau and has helped thousands of homeowners crunch the numbers and save money on FHA mortgages. New American Funding will also work with you if you don’t have an extensive paycheck history, and now provides non-traditional income validation services.

Right now interest rates are low and it’s to your benefit to check out your options and make a move sooner rather than later.

Find out how much home you qualify for with an online mortgage calculator, crunch the numbers on your refinance, or simply learn about what it takes to get an FHA mortgage.

Just because you have a 620 FICO Score doesn’t mean that homeownership is out of reach. You can succeed with the right mortgage loan strategy. And being smart about selecting the right experienced loan provider to guide you through the process.