Mortgage with a low credit score: possible and affordable

Can you get a mortgage with a low credit score but good income?

• FHA loans allow FICO scores as low as 500, and VA loans have no minimum credit score
• Portfolio lenders keep “non-prime” loans on their own books and accept bad credit and scores as low as 500
• Private (hard money) lenders accept low credit scores but have very high fees and interest rates

Here’s what you need to know about options for low credit scores. And check out our list of best mortgages for a 550 credit score.

Mortgage with a low credit score

It’s not difficult to get a mortgage with a low credit score. The hard part is finding one that offers an affordable interest rate alongside fees that aren’t too high.

If your score is somewhere in the 500s, you’re bound to pay more for your loan than those who are more creditworthy. But, if you spend some time getting multiple quotes, and hunting down the best possible deal, you could get a mortgage that works for your household budget.

How much more?

FICO, the company behind the most widely used credit scoring technology, has a handy online calculator. This lets you see roughly how much difference your score makes to your mortgage payments.

Related: Solve these 3 problems and improve your credit score fast in 2018

It may not be easy to watch. Someone with a 635 score and a $200,000 mortgage will likely pay over $70,000 more than someone with a 760 score. That’s over the 30-year life of a fixed-rate loan and is based on a nationwide average on the day this was written.

Unfortunately, the lowest band of scores covered by that calculator is 620-639. If yours is lower than that, expect higher rates and payments.

Best mortgages for a 550 credit score

But the lure of homeownership is strong. And many are willing to pay what it takes to achieve their dreams. So what are their choices?

FHA loans

Loans backed by the Federal Housing Administration (FHA) are in theory available to those with scores as low as 500. But there are many reasons for having a low credit score, and only some of them are acceptable to mortgage lenders.

A low score because the credit history is short is not the same as the low score because the applicant has a history of blowing off financial obligations. FHA guidelines state that you need to have a clean history for at least a year after a bad stretch.

Keep in mind also that FHA cannot force lenders to make loans they don’t like — each lender can impose its own higher FICO thresholds and other rules. In mortgage industry jargon, these additional criteria are called “overlays.”

Still, in late 2018, 26.9 percent of approved FHA mortgages went to applicants with FICO scores under 640. So there’s plenty of hope for would-be borrowers with lower scores.

For example, if you need a mortgage with a 550 credit score, you may get approved if you have at least a 10 percent down payment. If you’re at 580 or higher, you only need 3.5 percent down.

VA mortgage loans

Mortgages backed by the Veterans Administration (VA) are privileges extended to those (and their families) who are serving or have served in the US military. And they certainly do that. For those who are eligible, there’s no formal floor on credit scores and you need no down payment: zero.

Keep in mind that while the VA sets no minimum FICO score, the mortgage lenders who actually fund the loans may have them. Just like FHA lenders, VA lenders can choose to impose overlays when they evaluate applications.

Private sources for a mortgage with a low credit score

Getting a mortgage with a low credit score from the private sector is certainly still possible. But, absent a government guarantee for the loan, the terms naturally tend to be tougher.

For example, LendSure lends to borrowers with a 500 credit score. But, if your score’s that low, it will cap your loan-to-value ratio (LTV) at 65 percent. In other words, your maximum mortgage can be only 65 percent of the fair market value of your home.

Portfolio mortgages

Lendsure and companies like it are portfolio lenders. And they work differently from most mainstream lenders.

Unlike Fannie Mae and Freddie Mac loans, which lenders often sell to investors, portfolio loans stay with their original lender. So the lender that’s taking the risk gets to make the rules. And that can result in more forgiving guidelines.

Related: What is a portfolio mortgage?

Hard money is hard for a reason

There is one source of money that even those with terrible credit can access — if they can afford it.

So-called “hard” money, also known as private lending, can be a decent way to access fast cash to buy or flip a home. However, it’s not cheap. That’s because hard money lenders base their fees and guidelines on the assumption they’ll end up foreclosing on your home — so they won’t lose money if you default.

Expect high upfront fees (several points), high-interest rates (double digit) and a high loan-to-value ratio. In most cases, you’d be better off improving your credit picture and getting a mainstream loan. But not always. Even investors with good credit may choose hard money financing when they need fast cash for a great investment.

But most home buyers are better off sticking to a more affordable mortgage with a low credit score.