Just as it determines whether you qualify for other forms of credit, your credit score affects whether you get approved for a mortgage loan. Since most lenders want to see credit scores higher than 700, it can be difficult to get approved with a 550 credit score from mortgage lenders. Even if you get a mortgage, you will pay a higher interest rate with a lower credit score.
Investopedia notes that a credit score of 635, for example, compared to a score of 760 may result in only a little more than a 1.5 percent rate difference. But this can add tens of thousands of dollars more that you'll pay extra over the life of a 30-year mortgage.
Shop Around for Lenders
Contact lenders in your area and ask to talk to a loan specialist. Let the person know how low your credit score is. Inquire whether the financial institution has any lending options available for people with poor credit. Bear in mind that if you are approved for a mortgage loan at a higher rate of interest, you will be paying more interest over the life of your loan, and usually higher monthly payments.
Improve Your Credit Score
A higher credit score will improve your chances of getting a mortgage and may qualify you for a lower interest rate. Pay down or pay off revolving credit accounts. Try first paying down credit cards that have balances close to their limits. Don't miss any payments or pay accounts late, as consistently paying your bills on time will definitely give your credit score a boost.
Figure Your Debt-to-Income Ratio
Watch your debt-to-income (DTI) ratio. A lender is going to look at how much debt you owe. The fewer debts you have to pay, the more money you will have left over at the end of the month. Keep your DTI as low as possible -- preferably no higher than 36 percent of your income. While lenders generally base their calculation on your gross monthly income, basing it on your net income will give you a better idea of how much money you can spend.
Down Payment High as Possible
Estimate how much money you can come up with to put down on a mortgage. Although lenders generally require as much as 20 percent of the home’s purchase price as a down payment, some will accept a down payment as low as 5 percent. However, if you have poor credit, making a higher down payment can help you get approved for a loan.
Consider an FHA Mortgage
Apply for an FHA mortgage loan, especially if you are a first time homebuyer. Contact FHA lenders in your community to find out if you meet the criteria necessary to qualify for an FHA loan. Loans guaranteed by the Federal Housing Administration allow you to have a lower credit score than if you were applying for a conventional mortgage.
With a credit score of only 550, you must have a down payment of at least 10 percent, according to FHA loan requirements. You might also be asked to complete a credit counseling program before applying for a loan.
Extend Term to 40 Years
Talk to a lender about applying for a 40-year mortgage term. Because monthly mortgage payments are lower when stretched out over a longer term, even if your past credit history is poor, you may still get approved for a loan.
Find a Co-Signer
Ask a family member to serve as a co-signer for your mortgage. Co-signers take a huge risk, as they will be held responsible for the debt if you don’t make the loan payments. However, a parent or other close family member may be willing to co-sign for your mortgage loan until you get on your feet financially. Once your credit improves, you and your spouse can refinance the mortgage in your names alone.
New Mortgage Can Improve Credit
Once you get a loan, work on improving your credit from here on in by always making your mortgage payments on time. You need to show the lender that you are trustworthy and able to repay the loan. By improving your credit score, eventually you will be able to refinance your mortgage at a lower interest rate.
- Once you get a loan, work on improving your credit from here on in by always making your mortgage payments on time. You need to show the lender that you are trustworthy and able to repay the loan. By improving your credit score, eventually you will be able to refinance your mortgage at a lower interest rate.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.