The first thing to note is that this is not a guide on how to take on a loan irresponsibly. Having poor credit indicates financial issues, and it’s highly important to evaluate whether you are ready for the responsibility of a mortgage before you follow the advice listed here.
With that said, having a less-than-stellar credit score does not automatically mean you are financially irresponsible. Many people with low credit scores are working their way into a better place, or may have suffered a setback.
If you have a credit score that is less than 680, you’ll definitely be paying more, and in more than just one way. Firstly, your interest rate could be up to twice that of a borrower with prime credit. A borrower with a credit score between 780 and 850 may qualify for a loan just under 4%, whereas a borrower with a score under 640 could likely see rates near 6% (myfico.com).
While typically homebuyers expect to put down 20% on their home, subprime homebuyers may be required to put down up to 60%. On a $200,000 mortgage that’s $120,000!
Most lenders will need a FICO score of 620 at bare minimum, but there are a few cases where borrowers with scores below 580 are approved for a loan. These typically only happen on a case-by-case basis and are extremely rare. Extremely.
Underwriters are meticulous about approving low credit score applications. Lenders will want to know the story of why your credit is poor. Were you the victim of a major life event that caused a financial setback, like a death in the family or an illness? Or is your credit score the result of late bill payments and accounts in collections? Be prepared to give a detailed account of the items on your credit report. Most lenders will want you to at least try to raise your score as much as possible before applying for approval.
Again, being honest with yourself and considering if you are really ready for a mortgage is imperative. Is homeownership right now really worth paying thousands and thousands more with poor credit? Usually spending some more time working on building your credit and getting a much better deal on a mortgage is many times more worth the effort.
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