So you have a bad credit score and you need to take out a mortgage to purchase a house of your own. Normally, banking establishments require a credit score of 700 or higher to approve a mortgage. However, those with a bad credit score would normally not qualify for a mortgage.
But first, what’s Credit rating.
A ‘bad credit score’ can be interpreted in many ways by loan lenders. A loan lender would typically require a credit score upwards of 620. On the other hand, the lenders do not approve a mortgage purely on the basis of a credit score. There are other factors that are also considered.
Some of which are:
- the Age of the account: this basically looks at how long you have been having the line of credit.
- Regularity of making payments: they check if you have the tendency to max out your credit limit or if you make payments on time. The frequency of regular payments is considered important.
- History of opening up new credit lines. If you have made too many inquiries or opened too many accounts your credit scores will be affected.
Some lenders will be willing to turn a blind eye to a bad score provided it was greater than 600. According to bankrate.com, the following are the status of the credit scores.
|750 and higher||excellent|
|749 and 700||good|
|650 to 699||fair|
|600 to 649||poor|
|599 and less||bad|
If your credit score is less than 700 but greater than 600, you can still secure a mortgage even though you have a ‘bad credit score’. The government funded FHA mortgages have reduced their requirements. To be eligible, you should have a FICO score of at least 580. Failing which you should be able to deposit a minimum of 10% of the mortgage amount. However, all is not lost.
Bankrate reports that Carrington Mortgage Services have approved mortgages from applicants having a score of 550.
What can a person with a poor credit rating do to secure a mortgage?
If your credit score is less than 580 you can still obtain a mortgage if:
- You are willing to make a down payment more than 10% of the loan amount
- You take remedial action to improve your credit. According to myFICO, reducing your credit card balances should be a priority and advises you should “stop using your credit cards”. A plan should be drawn up and implemented to ensure credit cards with a higher interest is paid more while others accounts are maintained by ensuring the minimum amounts are paid.
- You look for a lender with minimal overlays
- Ask for mortgaging options. One such options is “Adjustable Rate Mortgage” which offers you a low interest for a short period providing you with the opportunity to remedy your poor credit status.
- You can get a family member with good credit history to be a co-signer.