Getting a Mortgage with Bad Credit

Qualifying for a mortgage loan or refinance with bad credit is a lot harder than it used to be. Given that widespread defaults on subprime mortgages triggered the financial meltdown of 2008, lenders have become much more cautious about who they’ll extend credit to.

That doesn’t mean it’s impossible to get a home loan with poor credit, but the minimum standards are higher. Also, you’ll likely find it a lot more costly to get a mortgage or refinance with less-than-perfect credit.

So what’s the bottom line? Your best bet for qualifying for a home loan – either a purchase or mortgage refinance – with bad credit is either the FHA or the VA if you’re a military veteran. Both officially will accept loans with FICO credit scores as low as 580, although individual lenders may require a minimum or at least 620.

The FHA and VA don’t actually write mortgages – they insure mortgages that meet their standards that are issued by qualified lenders. So it’s up to the lenders themselves to decide what credit scores they’ll accept, and at what terms.

Consider brokers, small lenders

Some smaller lenders may be willing to accept a lower credit score than the major banks will, particularly community banks or credit unions. If you have poor credit, it’s more important than ever to shop around and compare different lenders. You’ll likely not only find a difference in their willingness to lend, but also significant variety in the terms they’re willing to offer. A mortgage broker can also be a smart choice when you have bad credit, as they're in the business of sifting through multiple lenders to find one that meets your needs, although you will pay a premium for this service.

One thing you won’t be able to escape is that getting a mortgage with poor credit is going to be costly. According to the Fair Isaac Co., which invented the FICO scoring system, a borrower with a score in the 620-639 range can currently expect to pay an interest rate about 1.6 percentage points higher on a 30-year loan than someone with near-perfect credit of 760 or above – about 6.3 percent instead of 4.7 percent for the “ideal” borrower. That works out to about an additional $100 a month for each $100,000 of your mortgage – not cheap.