How to Get a Mortgage With a Low Credit Score

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The current combination of low mortgage rates and rock bottom home prices means there has never been a more attractive time to buy a home, but do you even have a shot if your credit isn’t perfect?

Is My Credit Score Really That Bad?

A few years ago you could walk into a mortgage broker’s office and get a home loan with a credit score in the 500s, but those days seem to be long gone. Many loan programs demand at least a 680 credit score today, and if you don’t have at least a 620, don’t expect a call back. However, just because you don’t have perfect credit, don’t give up yet. We’ll show you a few other options for how to get a mortgage with a low credit score in a moment.

Pimp My Credit Score, Please!

So your credit has taken a few blows in the last few years, and it isn’t quite where you need it to be. All hope is not lost, and you may be able to give your credit a quick boost and be on the path to getting a deal on a new home before you know it.

There are two main things holding back most people’s credit score today. The first is having missed a few payments and the second is simply not having any good credit recently to counteract the bad.

If you don’t know what your credit really looks like, get a copy of your credit report and scores today. By law, every American is entitled, annually, to one free copy of their credit report from each of the big three credit reporting agencies. The Federal Trade Commission says that is the only authorized source, so be sure to use them for your free annual report. If there are any negative items showing up on your report that you believe are unjustified, address them immediately. Each credit report details how to dispute items you feel are in error.

If your credit took a dive after the economy went to pieces a few years ago and you haven’t established any new, good credit, especially after a bankruptcy this should be on the top of your to-do list. Don’t go wild applying for credit all over town, but trying to get approved for a secured credit card from your local bank could dramatically improve your credit score in the next few months, provided you use the card and pay the bills on time.

Compensating Factors - The Ace up Your Sleeve

A great loan officer knows how to get you a mortgage with a low credit score if you have what is known as “compensating factors.” This is essentially anything positive which can act as a trade-off for a less than ideal credit score. For example, if you are willing and able to put down a larger down payment, or you have a considerable amount of liquid assets, a lender’s automated underwriting system may still approve you. The same goes for having a very low debt-to-income ratio if you have very little other debt and are not stretching yourself.

In some cases, if you can prove that any negative credit was the result of one time, unavoidable circumstances that were out of your control, then exceptions could be made to approve you as well. This could include things like losing a business, a death in the family, a family member being deployed to active duty in the military, or an accident that left you hospitalized and temporarily out of work. If all else fails, perhaps you could find a family member willing to act as a co-borrower.

Alternative Home Loan Options

After exhausting the above options for how to get a mortgage with a low credit score and still coming up empty-handed, there are two more solutions to pursue before giving up.

If you are making good money, and monthly payments aren’t an issue, you could turn to a hard money lender for a home loan. The interest rates won’t be pretty, and they may still want to take a look at your credit report, but there is a lot less paperwork and it could be worth it if you can get a huge discount on the home of your dreams. Just make sure you apply yourself to fixing up your credit as quickly as possible in order to refinance into a more manageable loan as quickly as possible.

If your credit is so bad that it even burns your eyes to look at it, then there is one last option. With so many homeowners desperate to sell today many are offering seller financing. In many cases they won’t even require a copy of your credit report, and you may find the rates very reasonable. Just watch out for the many scam artists out there, and have a real estate professional or attorney help you with the paperwork to keep you and your investment protected.


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Laura Murray
Weichert - Silver Spring, MD
Search Montgomery Co., MD for homes

I am beginning to here that the no verified income loans (otherwise known as lier loans) are starting to come back too.  I know it is scary. 

Jun 22, 2012 02:43 AM #1
Eric Proulx - Kirkland, WA

Wow Laura, that's not good news. Last thing we need is even more foreclosures. Thanks for the comment!

Jun 25, 2012 12:59 AM #2
Andrew Capelli
Hoover Elementary - Hazel Park, MI

Eric: Nice, common sense article.  Another couple of alternatives to mortgages include land contracts and leases with options to purchase (some of which can be written to count the rental payments as down payments if the option is exercised).  "Bruised" credit is certainly an issue affecting a lot of Americans- Thanks for sharing!

Jun 28, 2012 04:00 AM #3
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