Bad credit can find anyone. A couple of missteps or bad decisions and the next thing you know you’re in the credit dog house. Having bad credit can make life especially difficult when you’re trying to get a home loan. Most mortgage companies take your FICO score into account when determining how much of a credit risk you are for a conventional loan. A FICO score is a three-digit number ranging from 300 to 850 that is used to determine what your rates and terms will be. A score of above 700 is considered good and not a credit risk. If your score comes in below 670, you may have a difficult time finding a borrower to lend you money for a new home.
But fear not, all is not lost. There are ways that you can still secure a mortgage loan with a low FICO score. Here are five that we’ve collected:
- Put down a larger down payment. You can offset a low credit score with a larger down payment, which will improve your LTV, or loan-to-value ratio. Lenders will like this because you will need to borrow less, and you’ll have more equity in the house.
- Look into a non-conforming loan. Some mortgage lenders will offer non-conforming loans to individuals with bad credit or low FICO scores. The rates may be higher to compensate for the risk, and the buyer’s debt-to-income ratio typically needs to be lower than 42 percent.
- Take advantage of a government-backed loan. FHA and VA loans either require very low down payments (3.5% for FHA) or none at all (VA) and have no minimum credit qualifications. And the rates are usually comparable to conventional loans. The downside is there are usually stricter loan limits, and in the case of FHA loans, you need mortgage insurance.
- Pay off other loans and lower debt. Your debt-to-income ratio is a big factor when determining if you can secure a loan, so by lowering your debt you help put that ratio in your favor. Pay off as many credit cards and other loans as you can.
- Review your credit report. Sometimes a review of your credit report may show some errors that you are unaware of. You can submit a dispute and get those removed. To find out your FICO score, you can visit Experian’s FreeCreditReport.com site or ask your bank to see if they will provide it for you.
Don’t let a low FICO score prevent you from home ownership. Look into these five tips and if you still need help, reach out to a NASB home mortgage professional at 855-465-0753 or click here .