Robert PinzhofferPresident / CEO
Mortgage Approvals For Bad Credit
Some 21 percent of Americans have scores below 600, which is considered subprime, according to credit bureau Experian. Even the average credit score, 675, is too low to qualify for the best rates on conventional mortgages.
The good news is that it’s possible to buy property with an average or even poor credit score. In fact, government programs including FHA and VA loans, as well as lenders that specialize in lower credit such as Carrington and Quicken Loans, are making home loans more accessible for the credit challenged.
“Just because you have a low credit score doesn’t mean you can’t purchase a home. There are a lot of options out there for consumers with low FICO scores,” says Randy Hopper, senior vice president of mortgage lending for Navy Federal Credit Union.
Offset credit problems with cash
Most lenders consider three things when deciding whether to approve your mortgage application: debt-to-income ratio, credit score and loan-to-value ratio, or LTV.
You might be able to offset a poor credit score with a larger down payment, thus improving the LTV. A larger down payment can also help make you more attractive to lenders, since you’ll need to borrow less money for the purchase and have more equity in the home.
Some people with poor credit turn to friends or relatives for down payment money. Lenders are okay with this but may require a letter from the person who put up the cash stating that it’s a gift. If you get a cash gift, make sure you deposit that money in your bank account as soon as possible.
“The lender has to know where that money came from, so let it season in an account for at least 60 days. Otherwise you might not be able to use it right away,” Bill Banfield, executive vice president of capital markets for Quicken Loans, says.
Take advantage of government-backed programs
If you go outside of conventional loans, such as FHA or VA programs, your down-payment obligations shrink or disappear altogether.
“One of the largest financial advisor firms in the country wrote a blog which stated that to get a mortgage you need to have 20 percent down,” Banfield says. “And I remember thinking ‘man this myth of how much money you need down really sticks around.’ It’s just not true.”
The VA program doesn’t always require a down payment and FHA loans require 3.5 percent. Plus, they have no minimum credit qualifications.