Most aspiring homeowners with low or bad credit think that they won’t ever have the chance to own their dream home because no lender would work with them right? Not necessarily. Yes, mortgage lenders want borrowers with good credit because it’s one of the main indicators of a borrower’s ability to pay their monthly mortgage payments, and having a low credit score could work against you. But how low is low exactly?
What’s Your Credit Score?
Generally speaking, if you have a credit score of 760 or higher, lenders consider you a low-risk borrower, which means that you’re chances of getting the best interest rate and loan terms are practically guaranteed. A credit score between 759 and 700 is good, a score between 699 and 650 is fair, while a credit score below 650 is low or bad. But don’t let your low credit score squash your dreams of homeownership because you do have some options when it comes to home loans.
The FHA Choice Loan
FHA loans were specifically developed for borrowers with low to moderate income and those with low credit scores; even a 580 score would make you eligible for an FHA choice loan. FHA loans even allow borrowers to put down significantly low down payments. However, since the government insures FHA loans, you have to pay for PMI or private mortgage insurance upfront as a safety net for lenders should you default on your mortgage.
The VA (Veterans Affairs Loan)
If you are a retired or active military member, you might qualify for the Veterans Affairs’ VA loan. VA loans come with relatively fair interest rates, no PMI, and no to low down payment. You could even qualify even if your credit score is 620 or lower.
The 15-Year Fixed-Term Mortgage
According to Freddie Mac and Fannie Mae guidelines, a majority of conventional loans require borrowers to have a credit score of 620 or higher. But if your credit score is 620, which is the minimum requirement, you’d probably get a higher interest rate. However, if you take out a fixed-rate loan with a 15-year loan term, some lenders would disregard your credit, meaning that whether you have a credit score of 740 or 620, you would still be offered the same interest rate. This is of course provided that you satisfy all the other requirements such as the minimum down payment, stable income, low debt-to-income ratio, etc.
Regardless of your circumstances, there’s a suitable home loan option for you. Do your research to determine which option you could qualify for and then talk to different lenders to figure out your best option.