What can you do if you’re wanting to buy a home and looking at a FICO score that is below 620?
Well, people with poor credit can still get a mortgage, but they will pay far more than even those with credit scores on the margin.
If you’re having problems and looking for avenues, your best bet is programs available through the U.S. Department of Housing and Urban Development, Fannie Mae and Freddie Mac. Both Fannie and Freddie have low-down payment mortgages available to their lenders. Note: Fannie and Freddie, as financiers, do not offer mortgages directly to homeowners. You'll need to ask your lender about their relationship to the government-sponsored enterprises.
If you’ve already had housing problems, guidelines from HUD and others advise waiting at least two years after a short sale, so long as credit after the short sale is good.
Here are some key things you can do.
1. Get an FHA, then refinance ASAP
Got a credit score below 600? You'll need 3.5% down and insurance on the mortgage from the Federal Housing Administration. Despite being federally backed, FHA mortgages cost more, because of the added risk. But, it's those same, higher costs that should incentivize you to refinance.
A bad credit mortgage may seem like the borrower is signing away their life on a bad deal, but it may be the way to go if it's the only option available right now.
So once you get the "bad" credit mortgage, keep in mind you want to refi into a better deal ASAP. This will be possible so long as you, the homeowner, maintain your credit after the mortgage is signed. This way, you can be eligible to refinance for a much better deal within two years, and credit will have improved.
In short, a bad credit mortgage is a short-term solution that gets you in a home. It's important to bear in mind that bad credit needn't follow the borrower longer than necessary.
2. Ask about options
The 30-year mortgage is a popular choice, but maybe not the right one if the borrower's credit is weak. Adjustable rate mortgages are also a possibility, depending on the circumstance, during which time the borrower can work on repairing and maintaining their credit while paying at a lower interest rate than are offered on fixed-rate mortgages. Here is the Consumer Financial Protection Bureau's handbook on ARMs.
Many people who had their credit torn up in the recession were not the typical bill skippers. They were hard-working, responsible people whose world was upended through layoffs, downsizing, the loss of contract work, and a dozen other legitimate reasons.
3. Get a co-signer
Many have some other assets, or have family members who are responsible. These people may be willing to co-sign. Federal Housing Administration rules allow for a co-signer on loans.
Above all, check with HUD, FHA, the FHFA, Fannie Mae and Freddie Mac for information on pathways to homeownership for those who have damaged credit.