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It’s Doable! How to buy a home, even with a challenging credit history

Having challenging credit, including a lower credit score, imperfect payment history or negative credit events, does not exclude borrowers from being homeowners a dream home is still attainable even if one's credit score falls below the ideal number. 

Many prospective mortgage seekers are in this predicament. According to Forbes, roughly 15% of U.S. consumers have credit scores in the 500 to 599 area based on an 850-point scale, as determined by the common credit scoring company FICO. This is considered poor to fair credit, based on FICO's scoring system. Meanwhile, another 10% are in the 600 to 649 range, which is deemed as fair credit.

When it comes to a mortgage, a low credit score may prevent a borrower from obtaining a loan. If it doesn’t prevent you from securing financing, it may become costlier in the form of higher interest rates or a bigger down payment. Less-than-perfect credit coils also lower your loan-to-value ratio, which is the amount of financing available compared to the value of the property. This means that a significant deposit of at least 20% to 25% of the value of the home as opposed to ordinarily being 5% to 10% might be required.

Mortgage Types and Credit Scores

The credit score needed to qualify for a mortgage depends on the loan type being applied for. Conventional loans, which follow Agency and conforming guidelines (Fannie Mae/Freddie Mac) and are not backed by the Federal Housing Administration,may be the most ideal for those borrowers who have higher credit scores as well as cash saved up for a down payment. These loans may be less expensive over time because of mortgage insurance requirements.

For a borrower to apply for a conventional loan, a credit score of 620 and above is needed. If a prospective homebuyer's score is below 620, lenders will not be able to approve the loan or might have to offer a higher interest rate that could result in increased monthly payments.

However, a conventional non-conforming loan is not out of the question. Homebuyers could still qualify for a conventional loan that is “non-conforming” or one that falls short of Fannie Mae and Freddie Mac requirements. This can be an option for both credit-challenged borrowers or those under bankruptcy.

Another option is mortgages that are backed by the Federal Housing Administration (FHA). Through the FHA, loans are available that have low down payment alternatives as well as lower minimum credit score limits. In general, to obtain a maximum financing on a typical new home, prospective homebuyers need a credit score of 580 or above. Those with credit scores between 500 and 579 will be "limited to 90 percent LTV," according to the FHA. However, these borrowers will have to pay for the added cost of mortgage insurance.

There are also other mitigating factors that allow borrowers to still get a mortgage despite falling short in the credit score department. These include the borrower having a steady source of income, a favorable debt-to-income ratio, and a considerable down payment. 

Borrowers can also demonstrate that they are dependable by showing that they can meet their regular payments, such as utility and credit card payments, both on time and in full. In short, despite the lender considering a lower credit score as a higher risk, there are ways the borrower can get around this obstacle  to homeownership.

Working with Arrive Home can help borrowers with less-than-desirable credit scores purchase a home. Connect with an Arrive Home team member today to learn more about the options available to you.

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