By Casey Bond, originally found on Huffington Post
Bad things happen to good people, and bad credit is sometimes one of them. It can be a pain: A poor credit score makes it tougher to get approved for credit cards and loans. And when you are approved, the interest rates are sky high.
So for those of you with bad credit, it’s no surprise if you’ve written off becoming a homeowner. But don’t give up just yet. It is possible to get a mortgage with bad credit.
What Is Considered Bad Credit When Buying A House?
“Bad credit” can mean different things depending on whom you ask. That’s because you actually have dozens of credit scores, all of which vary depending on the credit bureau and scoring model. However, your FICO score is what’s used by 90 percent of lenders when making decisions.
According to credit reporting agency Experian, this is how FICO credit scores break down:
800 or higher: Exceptional
740-799: Very good
579 or lower: Very poor
Experian notes that those who fall into the “fair” range are considered to be subprime borrowers. That means they represent a higher risk to lenders and, in general, are going to be subject to higher interest rates and fees when borrowing money. A score under 580 means your credit is in pretty rough shape and there’s a good chance you won’t be approved for a loan at all.
When it comes to what’s considered bad credit by mortgage lenders, it varies. Different lenders have different underwriting standards, and credit scores can play a bigger or smaller role in your overall approval chances depending on other factors, such as income, assets and the property you’re financing.
Typically, however, you’ll experience some friction if your score is between 620 and 740, according to Yves-Marc Courtines, a certified financial planner and former mortgage banker who now runs Boundless Advice in Manhattan Beach, California. He said a score in this range can result in a slightly higher interest rate, having to pay mortgage points or being restricted in how much you can borrow.
A credit score of 620 is considered the cutoff for getting a mortgage from traditional lenders.
“Buying a home with poor or bad credit is an option, but you may need to go through lenders of unconventional means,” said Abel Soares III, a former loan officer who is now a certified financial planner and CEO of Hui Malama Advisors in Honolulu. “This means that you may have to go through private lending or mortgage brokers and not your local bank.”
Bad Credit Mortgage Lending Options
Soares noted that with mortgages through private lenders (which include individual investors and “hard money” lenders that often finance individual properties), the interest rate for a borrower with bad credit will be higher and the minimum down payment will likely be heftier. “Keep in mind that if interest rates rise, you will be stuck with the existing mortgage and rate, so you want to make sure that you can afford the payment for the long haul,” he said. However, it might be better to rehab your credit score and refinance at a lower rate in the future. If you had to accept a prepayment penalty on the loan, check that the terms don’t make a refi even more expensive. Also, watch for “creative” loan structures that can saddle you with unaffordable payments after the first few years.
You might also be subject to stricter underwriting standards, which are the lender’s requirements to prove you qualify for the loan.
“There are often different underwriting guidelines, and the lenders may have you submit documentation different than your standard mortgage application,” Soares explained. In other words, be prepared to jump through a few more hoops if your credit is fair or very poor.