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How to Find Reputable Low Credit Score Mortgage Lenders

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Finding reputable lenders for low credit scores is possible

The first time I tried to buy a home, every lender I talked to rejected my application. I had very little credit and lenders simply didn’t feel comfortable taking a chance on my ability to repay such a large loan.

At the time, I felt defeated and thought I would be stuck renting my tiny apartment forever. In the end, I worked hard for a couple of years to improve my credit score and qualified for a conventional mortgage.

I wish I had known that I had options instead of waiting it out so that I could have started owning my own home sooner.

Finding a lender who is willing to loan money to someone with a low credit score can feel like trying to find a needle in a haystack.

Fortunately, there are plenty of lenders and loan programs out there that can help you to achieve your dreams of homeownership.

You should know where to find these lenders, how to assess your own credit score, and which loan products might be the right fit for you before you get started.

If you are early in the process of purchasing a home with a low credit score, then it is time for you to read on to find out what you need to do to qualify.

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How to Find Your Credit Score

Before you apply for a new mortgage, you might want to do a little bit of research on your credit score. Knowing where you stand financially is important so that you can apply for the right type of loan with the right lender. Finding your FICO credit score can be relatively easy.

Many credit card companies will offer your credit score to you as a complimentary service. This is how I keep tabs on my own credit score. When I receive my statement in the mail, my credit score is listed at the very bottom.

You may also have access to your FICO credit score through your online portal.

If your credit card company does not offer this or if you don’t have a credit card, you might want to consider signing up on myFICO.com. For just $20 per month, you can gain access to your score and monitor how it changes over time.

For those with bad credit who want to do a little financial heavy lifting before applying for a mortgage, this is a great service to make use of.

In addition to your credit score, you should also take this time to review your credit report. You can access a copy of your credit report with each of the three major credit bureaus each year.

All you have to do is go to annualcreditreport.com to request your copy. Make sure to go through this with an eagle eye to ensure that all your creditor information, current debts, and payment history is up to date.

If you spot any errors, write to the credit bureau and provide documentation to have the report corrected. This could also have a positive impact on your credit score if you have paid off some of your debt or have inaccurate information taken off your credit report.

Where to Find Low Credit Score Mortgage Lenders

Many prospective homebuyers worry that the elusive concept of credit will keep them from making one of the largest and most important purchases of their life. Credit is a determination of how likely you are to repay money that has been loaned to you.

The FICO credit score used by most lenders is represented by a three-digit score ranging from 300 to 850. A score from 580 to 669 is considered fair by most lenders while anything lower than 579 is considered poor. Anything over 670 is considered good credit.

A better credit score typically means lower interest rates which can add up to thousands of dollars in savings over a thirty-year mortgage.

Even a one percent difference in interest can save you more than $30,000 on a $200,000 mortgage. What many people don’t know is that there isn’t necessarily a specific minimum credit score required to purchase a house.

If you know that you have a low credit score, you might want to look into online lenders. Many online lenders have more flexible credit requirements than brick and mortar banks.

Lenders like Rocket Mortgage, Quicken Loans, Carrington Mortgage Services, and Homebridge all accept borrowers with their minimum credit scores ranging from 550 to 580.

You may also be able to find a traditional lender that is still willing to accept you despite your low credit score. The process is still roughly the same for those with bad credit and good credit.

The difference is that you may be required to help offset your low credit score with a sizable down payment or private mortgage insurance. You may also face a higher interest rate because the bank will be taking a risk on lending to you.

This means that you will likely face higher monthly payments than someone with good credit.

Each lender sets their own credit requirements, and you may find that some are a bit more flexible. They may decide to still accept your application after looking at your total financial health.

For example, they may take a closer look at your payment history, your credit utilization, and your debt-to-income ratio. With a larger down payment to offset some of their risk and a low debt-to-income ratio, you could still be a candidate for a new mortgage.

If you are applying to multiple lenders, make sure you do so within a two-week period. Each time you apply for a new loan, lenders are doing what is known as a hard credit pull. This gives them access to your full credit history including payment history, length of credit, and current credit utilization.

Usually, each hard credit pull can have a negative effect on your credit score, dropping it by a few points per pull. However, banks want to reward savvy shoppers who are looking for the best deal.

As long as you keep all applications to a two-week period, multiple inquiries will only be counted as one credit pull on your credit report. This will ensure that you don’t drop your credit any further, which will only benefit your long-term financial health.

What Types of Loans are Available to You?

If this is your first home, you may not realize that there are several different types of loans available to choose from. Some of them may be better suited to individuals with lower credit scores than others.

Most new homebuyers automatically think of a conventional mortgage where the loan is not backed by the government. Unfortunately, these loans do not have a set minimum credit score requirement, and each lender is free to set up their own required terms.

Many prefer to see scores that hover somewhere around the 620 mark.

Don’t sweat it if your score isn’t quite that high. You still have options, namely the FHA loan or the VA loan.

One option for those who have poor to fair credit is to look into government-backed loans like the FHA loan or the VA loan. Both offer the lender some security from the federal government in case you default on the loan.

Lenders are sometimes able to accept borrowers with lower credit scores for these types of loans because of that added layer of financial security.

FHA loans are great for people with low credit scores and not much saved for a down payment

FHA Loans

The FHA mortgage is backed by the Federal Housing Administration and has the lowest credit score requirement out there. Those who have credit scores ranging from 500 to 620 will qualify for this loan that features a low down payment option.

If you have a credit score of 500 to 579, you can qualify for the loan with a 10 percent down payment. The down payment amount drops to just 3.5 percent with a credit score that comes in above 580.

Keep in mind that your mortgage is not the only fee you will pay with the FHA mortgage. This loan program also requires mortgage insurance to protect the lender in case you default on the loan.

For those who are able to make the 3.5 percent down payment, you must pay this fee for the lifetime of the loan (or until you are able to refinance into a different loan type). When you put down 10 percent or more, you can cancel your mortgage insurance premiums after eleven years.

Mortgage insurance fees can really add up. On our latest home purchase, my husband and I were debating whether to go for the low down payment with the FHA loan or to take money out of our savings account for a conventional loan.

In the end, we opted for a conventional loan because it was going to cost us almost $200 per month in mortgage insurance fees. That’s a $72,000 savings over the course of thirty years!

VA Loans

Are you a veteran or active duty servicemember? If so, then you might want to look into the possibility of qualifying for a VA loan.

They are backed by the Department of Veteran Affairs and they technically have no minimum credit score requirements. As with a conventional mortgage, each lender will set their own minimum credit scores. Most will require a score around 580 to 620.

There are a lot of reasons you might want to consider going with a VA loan. First and foremost, they do not require any type of down payment. You can finance 100 percent of the purchase price of your home with this loan. Another benefit is that they do not require private mortgage insurance. While conventional loans and even FHA loans will require some degree of mortgage insurance, VA loans void this requirement for borrowers.

As if that wasn’t enough, these loans also typically feature extremely competitive interest rates compared to the other loan programs available.

Refinancing Down the Road

No matter what type of loan you choose now, you can always refinance it later. You can obtain a new mortgage now with your lower credit score. Over time, you will make consistent payments on your mortgage which will have a positive effect on your credit score.

Once this score improves, you might consider refinancing into a different loan type.

The main reason that many people investigate refinancing their loan is to lower their monthly payments. A higher credit score will likely qualify you for a lower interest rate which can make a substantial difference in your monthly payment as well as what you will pay over the course of your thirty-year mortgage.

You may also have built up enough equity in the property to get rid of your private mortgage insurance. If you originally purchased your home with an FHA loan, this is a key reason to consider refinancing.

An FHA loan with the lower 3.5 percent down payment will have PMI for the duration of the thirty-year mortgage. If you can refinance into a conventional loan, you can typically waive the PMI requirement once you have 20 percent equity in the property.

This can save you hundreds of dollars each month and tens of thousands of dollars over thirty years.

You can also choose to refinance a VA loan. These loans still have plenty of advantages over some of the other loan products available. However, you can refinance into a lower interest rate to drop your monthly payments substantially.

Start Saving for a Down Payment

Because of your low credit score, many lenders are going to ask you to put down a larger payment on your new home. You should start saving now to help shoulder the costs of a lower credit score.

Here are a few tips and tricks to get you started when it comes to saving a larger sum for your down payment.

Establish a Budget

The first thing you need to do to start saving up for your down payment is to establish a detailed budget to work from. This gives you an idea of where you are spending your money and how to better budget it for the future.

The first time I made a budget, I had very little idea what I was doing. I was spending money on all sorts of frivolous items, and all of my money would slip away from me by the end of the month. I was able to finally create a budget by taking the time to go through my bank account statements and see where my money was actually going.

You would be surprised how quickly those fast food runs can add up! Going through your bank statements is an objective way to examine exactly where your spending habits are at the moment and how you can alter them moving forward.

Lower Your Expenses

Once you have a budget in place, you can start to see where you could cut back. Do you have a hefty cable bill but you could be happy just streaming Netflix? Are you spending too much money on your morning lattes? How much do you spend on clothing or entertainment each month?

Determine areas where you are spending to excess and start to trim the fat on your budget.

Calculate how much money each change will save you monthly and deposit that amount directly into your savings account to reduce the temptation to spend it frivolously.

Some banks allow you to do this automatically, while others you might need to transfer the funds manually. In addition, you may have some expenses like previous loans or credit card bills that you can’t immediately erase.

Use the savings you get from lower your other expenses to pay those bills down as well, until they are completely paid off. This may even improve your credit score and boost it to a place where you can apply at even better lenders for your next mortgage.

Set Up Savings Account Transfers

Do you want to make sure that you actually set aside money into your savings account each month? Make it a priority by setting up automatic transfers from your checking account to your savings account.

You might split these up into two payments each month, particularly if you get paid biweekly. This forces you to view saving money in the same way that you might view your electric bill. The bill must be paid, and you are eventually going to have a large sum tucked away for your down payment.

If this isn’t enough for you, consider opening your savings account at another bank. I keep my savings account and my checking account at different banks so that it is less convenient for me to transfer money out of my savings account.

This forces me to really think about whether I need to make that purchase or if I should hold tight to my money for something more important.

Get a Side Hustle

The easiest way to save more money is to make more money. While you could prompt your boss to discuss giving you a raise, it might also be time for you to find a side hustle.

Many people have hidden talents that others are willing to pay for, and the money you earn could all be contributed directly into your savings account or into paying down some of your other debt.

When I was in college and saving up to purchase my first home, I realized I had a knack for writing papers. I started to pick up clients who wanted me to help them develop blogs and articles.

Eventually, that side hustle even became my full-time gig. Meanwhile, my husband was a talented digital illustrator so he took on a side hustle developing logos and designing t-shirts. He still does this for fun and it helps us to keep our savings account stocked and ready for whatever we might need.

Things to Avoid When Purchasing a Home

Just as there are many ways you can start to prepare to purchase a new home, there are a few things that you want to avoid. Namely, you need to avoid any actions that could impact your credit score in a negative way.

First and foremost, you should avoid opening new lines of credit or taking out new loans. It can be tempting to sign up for a new auto loan or to apply for that store credit card to get the discount, but this does not reflect favorably on your credit score.

Lenders may view you as an even greater financial risk if you are currently racking up more debt.

In a similar vein, you should avoid closing out any cards that you aren’t using. The length of your credit history accounts for 10 percent of your FICO credit score.

When you close out a credit account, you lose access to the history you have with that card. This also has a negative impact on your credit score.

Last but not least, you need to ensure that you never miss a credit payment. Payment history makes up 35 percent of your credit score. Missing even one payment can throw up a red flag to lenders that you are not a reliable borrower.

Set as many bills as you can to auto-pay, and set reminders in your phone to pay the rest. This takes some of the burden off your shoulders while still allowing you to make timely payments.

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Mortgages with Low Credit are Possible

If you have bad credit, the good news is that getting a mortgage is possible. Many lenders will accept people with credit scores ranging from 500 to 580, but it might cost you.

You might be responsible for a larger down payment or a higher interest rate to offset the financial risk to the lender, meaning a higher monthly payment might be in store for you.

Be sure to research all of your loan options from conventional to FHA loans to VA loans to ensure that you are finding the mortgage product that is the right fit for you.

Once you decide to move forward with your latest home purchase, you should start saving as soon as possible.

Chances are that you will be asked to put down a larger down payment, so you should be financially prepared to do so. Set up your budget, slash your expenses, schedule deposits into your savings account, and even find creative ways to make more money.

It might feel like a struggle to get a home with low credit right now, but it will ultimately be worth it when you can achieve your dream of owning your own home. Stop renting and start building equity in a home with some of these tips!

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Ashley Simpson Author

Written by Ashley Simpson

Ashley Simpson has been a writer and personal finance connoisseur for almost a decade. While she definitely categorizes herself as a saver – not a spender – you will often find her splurging on a good cup of coffee!

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