Prospective homebuyers may be surprised to hear that bad credit won't necessarily shut them out of the market completely. It is possible to get a mortgage with a subpar credit score — but your options are going to be limited and you're most likely going to pay in fees and/or interest.
What Score Do I Need?
General consensus among mortgage experts is that you need a score of 620 or higher to successfully obtain a conventional mortgage (think Fannie Mae- and Freddie Mac-backed loans). And, in fact, according to a report released by Equifax earlier this year, first mortgage originations for subprime borrowers (defined by the bureau as consumers with an Equifax Risk Score of 620 or below) showed steady growth from January to October 2015, with more than 312,000 new mortgages originated, totaling $50.7 billion.
Now, there is a chance you can get a mortgage with credit that's a bit worse. Mortgage experts told Credit.com back in February that most FHA-backed loans generally require a score of 600, though some lenders will do loans for as low as 580.
Those scores may not be the worst of the worst — most credit scoring models follow scales of 300 to 850, though Equifax's risk score utilizes a range of 280 to 850 — but they certainly aren't good.
Bad credit scores are generally considered any number under 600, whereas poor credit scores fall between 600 and 649; fair credit scores fall between 650 and 699; good credit scores are between 700 and 749 and excellent credit scores are 750-plus.
Remember the Caveats
Of course, just because you can potentially secure a mortgage with a subpar credit score, doesn't mean you should. A bad credit score is pretty much going to saddle you with a high interest rate, upping the cost of your mortgage.
Credit scores, for instance, play a major role in determining Fannie Mae and Freddie Mac's loan-level price adjustments — risk-based fees paid out on conventional loans. (The other major factor is your loan-to-value ratio, the amount of the mortgage you are applying for in relationship to the appraised value of the home you are looking to buy.) Loan level price adjustments go up or down in 20 point intervals with the most favorable one for mortgages capped at 740.
Even with that cap, it can be seriously worthwhile for someone with a bad score to fix their credit before they apply for a home loan. You can generally improve your credit scores by disputing errors on your credit reports, paying down high credit card balances and avoiding new credit inquiries while your score rebounds. To see where your credit currently stands, you can pull your credit reports for free each year at AnnualCreditReport.com and view two of your credit scores, updated each month, on Credit.com.
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