How Does Bad Credit Affect Your Mortgage?

If you have bad credit, there still may be a way to get bad credit mortgages but your credit score will affect your mortgage.

Your credit score is one of the main factors lenders will use in order to determine if you are a good or bad risk for a loan. Assessing your credit score can give a lender an idea of how much they can safely loan you and still have confidence that you will pay it back and make your payments on time.

Credit scores show a lender how you have handled debt and payments in the past. If you have several late payments or bankruptcies, these are red flags to a lender. The lender is in the business of making money and doesn’t want to lose it due to a risky buyer.

What Are the Bad Credit Mortgages?

If you have a score that is lower than 620, it’s not likely that you will receive approval for a conventional home loan.

However, there are other programs you can qualify for. You may be able to qualify for FHA loans, USDA loans, or VA loans.

The other option if your credit score isn’t that great is to take some time to improve your credit score. A lower score not only helps you qualify but also helps you get a lower interest rate.

Even if you can qualify with your credit score, you may still want to take some time to improve your credit score to avoid paying a higher interest rate.

With bad credit, your best option is an FHA loan. If your score is between 500 and 579 and you can put at least 10% down then you can probably qualify for an FHA loan. If you have a higher credit score and it’s somewhere between 580 and 620 then you can get away with a much smaller down payment.

Other advantages of FHA loans for those with lower credit scores include lower interest rates, shorter wait time after a negative credit event, and the acceptance of a higher debt-to-income ratio than other loan options.

VA loans and USDA loans can also be available to certain borrowers. VA loans can be used by active military members and USDA loans can be used by those who are purchasing a home in certain rural areas.

Your Credit Score Affects What Type of Loan You Can Get

There are mortgages available to those with bad credit, but your credit score will affect what you can qualify for when searching. Conventional loans are better for a borrower who has good credit.

However, if you can make a larger down payment, you may be able to qualify for a conventional mortgage with less than good credit.

Your Credit Score Affects Your Loan Pricing

The lower your credit score, the higher your mortgage rate will be, if you can even qualify at all. For example, a borrower with a credit score above 760 may have an interest rate of 4%.

A borrower with a 620-credit score may have an interest rate of 4.6% and that can add up to hundreds of extra dollars spent per month on mortgage costs.