The Ultimate Guide to Home Loans for Borrowers with Low Credit Scores
When was the last time you checked your credit score? This three-digit number is based on your financial history and represents how likely you are to pay back a loan on time. In other words, your credit score will rise if you pay your bills on time. But what if financial hardships in the past have left you with a subpar credit score? Is there hope for those looking to take out a mortgage on a low credit score? The answer is a resounding yes.
Here’s a comprehensive breakdown of what constitutes a low credit score and what type of mortgage loans you’re eligible to apply for if your credit score is low.
What Counts as a Low Credit Score?
While credit scores are evaluated using a plethora of models, we prefer using the ‘FICO Score’ model because of how popular it is among mortgage lenders. This model calculates credit scores based on the borrower’s payment history, debts owed, the length of their credit history, the type of credit they’ve taken out thus far, and how much new credit they’ve taken out.
According to consumer data analytics giant Experian, FICO scores are typically divided into five tiers between 300 and 850. Therefore, we define low credit scores as those that belong in the ‘fair’ (580 to 669) tier or below.
Types of Mortgage Loans for Applicants with Low Credit Scores
Minimum Credit Score: None
VA loans are mortgages issued exclusively to members of the armed forces as well as their surviving spouses and/or families. They’re backed by the US Department of Veterans Affairs and there’s no minimum credit requirement. In other words, it’s possible to apply for a VA loan no matter how low your credit score is—but the exact requirements vary from lender to lender.
VA loans don’t require the applicant to settle a down payment. However, if no down payment is made, it’s common for mortgage lenders to compensate for risk by establishing their own minimum credit score requirement for this type of loan. In other words, if you’re applying for a VA loan with a low credit score, it’s worth making a down payment to bolster your chances of a successful application.
We recommend speaking to a licensed mortgage lender about how much to pay down to maximize your chances of landing a VA loan. It’s also worth asking them whether there’s any other information you can provide about your financial background that’ll increase your chances of landing a VA loan with a low credit score. For instance, if your bank statement shows a healthy debt-to-income ratio and/or you’ve got plenty of savings, you might be eligible for a VA loan despite having a low credit score.
Minimum Credit Score: 500
FHA loans are issued by the Federal Housing Authority through approved mortgage lenders. They’re extremely popular among borrowers with low credit scores because of their flexible application requirements.
According to the Federal Deposit Insurance Corporation, borrowers with a credit score between 500 and 579 are eligible to take out an FHA loan provided they pay 10% of the purchasing price of the property as a down payment. On the other hand, if your credit score exceeds 580, you’re eligible to apply for an FHA loan and pay a down payment of just 3.5% of the property’s value.
It’s important to remember that FHA loans are subject to mortgage insurance. In other words, FHA loan applicants with low credit scores must pay qualified mortgage insurance premiums (MIPs) if their down payment is less than 20% of the price of the property. MIPs consist of an upfront premium worth 1.75% of the loan amount plus an annual premium between 0.45% and 1.05% of the loan.
Minimum Credit Score: 580
As the name suggests, FHA modular mortgage loans are issued by mortgage lenders approved by the Federal Housing Authority to borrowers interested in purchasing pre-fabricated properties. The required credit score to obtain an FHA modular mortgage loan is 580 (the same as all other FHA loans) and applicants are required to settle a down payment worth at least 3.5% of the purchasing price of the property.
With that said, FHA modular mortgage loans are only issued if the applicant proves the property was built after the 15th of June 1976 and has a floor space area that’s at least 400 square feet. Moreover, the property must meet the Model Manufactured Home Installation standards and have a permanent foundation.
In other words, if you have access to documents substantiating these requirements and the financial means to settle a 3.5% down payment, chances are you’ll qualify for an FHA modular mortgage loan with a low credit score. We recommend speaking to an experienced mortgage consultant for further clarification as the requirements for this type of loan vary from lender to lender.
Atlantic Home Capital’s Experienced Mortgage Consultants Help Clients with Low Credit Scores Browse and Apply for Home Loans
Now that you know what types of home loans borrowers with low credit scores are eligible for, it’s time to arrange an appointment with a mortgage consultant at a reputable home financing expert. That’s where our team at Atlantic Home Capital comes in!
As one of the best mortgage lenders in New York, we have extensive experience helping clients with low credit scores understand and apply for VA loans, FHA loans, and modular mortgage loans. We also offer comprehensive refinancing services and boast a team of bilingual mortgage experts with several decades of experience between them.