Millions of American consumers are looking for low credit score home loans that obtainable and affordable. Has your mortgage application been turned down? This can be really upsetting too many people, but you should not despair. Just because you were turned down by a lender for a mortgage loan with low credit scores does not mean you will be turned down with another.
Did you know that lenders typically reject as many as one in two mortgage applications for homeowners seeking a refinance, and approximately 30% of buyers? It is not always because of credit; it could be, but many things can sink a mortgage application, including high debt to income ratio, and a bad appraisal.
Why Mortgage Refusals Happen Because of Credit
It is important to remember that different mortgage companies have different lending standards. The investors for one home financing company may want to see a person with a higher credit score than you have to get a mortgage. Not every borrower is going to work for every lender and therefore not all applicants will be approved for low credit score home loans.
But this is ok because there are thousands of low credit mortgage lenders across the United States.
Even though credit criteria for getting a low credit home loans is more flexible today, there still are limits to what can be done.
How Much Mortgage Do I Qualify for?
For a conventional mortgage, many lenders still want to see a credit score of 680 or higher and low debt to income ratios.
For FHA loans, lenders will possibly lend to you with a credit score in the high 500’s or low 600’s. But this varies on the lender so talk to a loan officer to determine how much mortgage you qualify for.
What to Do If You Are Denied for Poor Credit
You really should not give up hope if you are turned down for a mortgage because of credit. Here are some things you can do if you are turned down for a low credit score home loan:
#1 Improve Your Credit Score
Yes, we know, this is a bit obvious. But did you know that boosting your credit score can happen fairly quickly? A great way to boost your score fast is to simply pay down your credit card debt as much as you can. Getting rid of a few thousand in debt can increase your score by dozens of points.
This is probably one of the fastest ways to boost that score. So you should save up your pennies and pay down your debt.
#2 Pay Your Bills on Time
If you have several late payments in the last year on your credit profile, this is going to hurt your score. You should resolve today to pay all of your bills on time, even if this means denying yourself things that you want. Getting your bills paid on time should come first.
Once you have shown that you have paid your bills on a timely basis for a year, your score should go up.
#3 Ask Lender for a Rapid Rescore
When you pay down credit cards, it can take 30 days or more for the change to be reflected on your credit report. If you are in the middle of trying to get a mortgage, this is really inconvenient. But you can ask your mortgage lender to do what is called a rapid rescore through an expedited reporting system. This should enable you to get a new credit score within 48 hours after you made changes.
But not every lender will agree to get a rapid rescore, so check with your loan officer.
#4 Try a Different Mortgage Broker or Lender
You would be amazed but one lender can tell you no way, and another lender will approve you. It all comes down to the lending criteria that that lender has set up with its investors.
People who shop around for low credit score home loans will usually end up better off than those who only try one or two lenders.
#5 Get Pre-Qualified for a FHA Mortgage
One of the best loan options available today for people with poor credit is the FHA loan program. This is a government backed mortgage with very flexible lending criteria.
As long as you have a credit score above 600, you may be able to find a lender that will work with you. An FHA-approved lender will be reimbursed by FHA if you do not pay your mortgage. Thus, more bad credit lenders are willing to extend credit to a higher risk person.
You will pay for the ability to get a loan by paying monthly mortgage insurance, but most people prefer paying mortgage insurance to continuing to rent.
Also note that paying mortgage insurance means that you may be able to put down just 3.5% on your new home.
#6 Become an Authorized User on a Credit Card
If you have a friend or relative with great credit and steady income, you can ask them to let you be an authorized user on their credit card. This will cause your credit score to go up, and it can be a substantial amount.
The Bottom Line
A low credit score is a problem when trying to buy a new home, but it does not necessarily prevent you from buying your dream home. You should try each of the tips above before you give up.