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Getting a Mortgage With a Low Credit Score

by Sandi Pressley

Here's a fact many people don't know. The credit score to buy a house can be as low as 580!

Having a low credit score doesn't mean that owning a home is impossible. It will mean, however, that a mortgage will cost you more than if you had perfect credit. But there are still many lenders that will work with you.

Here’s what you need to know about low-credit score mortgages:

What Counts as "Low Credit"?

We first need to get past the myth that you have to have amazing credit to buy a house. Lenders will take into account your entire financial picture. If you have a stable income, regular payment history, and cash in hand, this will all help if your credit isn't so stellar.

Here’s how FICO generally categorizes credit scores:

  • 800+ = Excellent credit score
  • 740-799 = Very good credit score
  • 670-739 = Good credit score
  • 580-669 = Fair credit score
  • Below 580 = Poor credit score

Having a credit score below 669 usually makes you what is called a  “subprime” borrower, according to FICO. This means that a loan will cost more, since you're a bigger risk. You will also have fewer options.

Your primary low-credit-score mortgage option will be FHA , which sometimes give loans with credit scores as low as 580. But the lower your score, the more it will cost you.

How Does Your Credit Score Affect Interest Rates?

Having a lower score means you will usually pay more of a down payment, higher interest rates, and private mortgage insurance.

Buy Now Or Work On My Credit?

If you pay a ton for rent, then buying now might be better, then you can refinance when your credit improves. For others, it may be smart to how promptly you pay your bills; it accounts for 35% of your score. A lender can help you decide. Or you can use an online tool to estimate the cost of different scenarios.

If you’re going to apply for a low-credit-score mortgage, more cash in the form of a bigger down payment helps. Plus, it can reduce your interest rate, which reduces your monthly payment.

How Do I Boost My Credit Score?

If you opt to work on your credit before getting a mortgage, here are a few ways to do it:

  • Look into rapid rescoring. You’ll work through your lender to fix errors and update information with the credit bureaus quickly, sometimes within days or weeks, rather than months. This isn’t credit repair, but a way to accelerate getting updated information through the system and into your report. Discuss with your lender whether this is a worthwhile pursuit for your circumstances.
  • Find a reputable credit counselor to guide you as the industry is fraught with scams.
    • Check your credit report for errors.
    • Pay off credit card balances.
    • Pay off other outstanding collections.
    • If you don’t have credit, get a credit card or small loan and establish a good payment history. (No credit is low credit.)

Even if you have a low credit score, a mortgage isn’t out of reach. While it may cost you more to buy now, in the end, it may be less expensive than waiting. And you’ll get the joy of owning a home to call your own.

Check back on our blog every week for more real estate advice and local articles about living in Albuquerque. And make sure to follow us on Facebook for up to date real estate news for Albuquerque and surrounding areas.

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