There are many myths in real estate.
For example, some people think you need a 20% down payment. Others assume you must be completely debt-free to qualify for a mortgage. Some even assume you must have flawless credit.
While good credit is certainly beneficial, it’s always possible to qualify for a mortgage when your score is less than ideal.
At San Diego Purchase Loans, we understand that not everyone has great credit. Life can throw so many financial challenges your way, that keeping a fantastic credit score is often the least of your worries. Medial bills, car repairs, and home appliance replacements are just three of the countless possibilities that can harm your credit score. Does this mean you should live without homeownership?
While some may benefit from waiting, you can qualify for a mortgage even if you have bad credit.
Understanding Credit Score Requirements for Common Loan Options
To increase your chances of approval, you need to first understand the credit requirements from the major loan options. Let’s look at a few of the minimum credit requirements for various mortgages.
Note: Score requirements can change over time so numbers reflected in this article may not be current. Consult a lending professional for up-to-date credit requirements.
Conventional – 620
For conventional loans, which are not supported by any government institution, you will likely need a score of 620 or greater. Generally this is the highest score you will need for a mortgage loan. These can be more flexible, as lenders are not held to the standards and guidelines set by government agencies such as the FHA or VA.
FHA Loans – 580 for 3.5% Down, 500 for 10% Down
FHA loans have different requirements that adjust how much of a down payment you are required to bring. If you have a score of 580 or better, you can use an FHA loan with a down payment of only 3.5%. However, if your score is between 580 and 500, you will need to bring 10% for a down payment, which can be a difficult total for many borrowers. If your score is under 500, FHA loans are not available.
VA Loans – No Minimum, But Individual Lenders May Have Credit Requirements
Loans backed by the Department of Veterans Affairs, usually called “VA loans,” do not actually have a minimum credit score. While the Department might not have an official number, there is a chance that a lender will. The specific number set by the lender will change dramatically from office to office, so we can’t really give an official number. If you are reject for a VA loan based on credit score, it may be beneficial to consult another lender.
USDA Loans – 640
For government institutions, the USDA actually has fairly high loan amounts. At 640, it’s one of the highest for government-backed loans. While the score requirements are high, USDA loans do have excellent terms, including the option for 100% financing, meaning you won’t have to bring a down payment.
How to Buy a Home with Bad Credit
Understand the System Behind the Score
If you don’t already, you need to understand how FICO scores are calculated. FICO scores are calculated using a complex mathematical formula to determine statistical risk. The biggest factor (35%) is payment history, which is essentially whether or not you’ve made timely payments in the past. The next, at 30%, is amount owed. This basically relates to the amount of available credit you have compared to how much you are using; having less debt compared to the total amount you could have is good for your score. The other important factors are length of credit history, credit mix, and new credit.
Research Your Credit Score Early
Once you have at least a basic understanding of how credit scores are calculated, you can research your own credit score. If you have a bad credit score, you should pull your own reports from the major vendors so you understand exactly why your score is low, which will then allow you to make strategic changes.
If your score is low because of too much debt, you can attempt to pay off some obligations. If your score is low because of missed payments, you can make an effort to ensure no late payments in the future. You should also look for inaccurate or outdated credit items that can be removed from your profile. Although the process can be long and possibly frustrating, removing these items will increase your score quickly.
Use as Much Cash as Possible
If you have done everything you can to increase your score and still need to buy a home with bad credit, one of the best strategies is to bring as much of a down payment as possible. Obviously saving for a down payment is easy to talk about and difficult to execute, but having a large down payment will increase your chances of approval. The more money you can save before meeting with the lender, the better off you’ll be when it comes time for loan approval.
With certain loans, you can also use gifts for a down payment. However, these usually need to be personal gifts, not loans from friends or relatives.
Use Government-Backed Options
If you look at the different credit scores required by various loan programs, you may notice a pattern: government-supported loans generally require a lower credit score. If you have a 10% down payment, for example, you can secure an FHA loan with a credit score of 500. If you are eligible for VA benefits, you can get a loan with a low down payment, depending on the lender servicing the loan.
Work with a Supportive Team for Mortgage Loans with Bad Credit
If you have bad credit and think a mortgage loan is out of reach, contact the helpful team at San Diego Purchase Loans. While we can’t guarantee loan approval, we can promise our best effort to increase your chances of an affordable loan.
From jumbo loans to helping with FHA loans, we have the knowledge, experience, and dedication to increase your chances of mortgage approval!
“Chad – Your team has been nothing short of amazing. Juliann has aggressively followed-up with escrow and gone out of her way to make sure things get done on schedule. Matt and I can’t express to you enough how much we’ve appreciated all of your counsel at the beginning of the process and her execution to see it through to close. As always, appreciate everything that you guys have done to see this through.”
“Chad, Juliann and the team were great in helping me get through this process. It is not an easy process but they stayed with me the entire time and I am truly grateful. ”
Thank you, Chad. You have been amazingly responsive to all my questions, and you have a great staff assisting you. Thanks so much for all your help!