What to Do If Your Credit Score is Too Low for a Conventional Mortgage?

If you earn a decent salary and have money in the bank for mortgage-related expenses, you may feel that now is as good a time as ever to apply for a home loan. Interest rates are rising, but still relatively low. And if home prices in your area are starting to come down or stabilize, you may excitedly apply for a mortgage.

However, the above factors are only a few pieces of the puzzle when applying for a home loan. Mortgage lenders are extremely particular of who they approve nowadays. And unfortunately, it takes more than stable income and cash reserves to get approved for a mortgage.

In 2008, the minimum credit score required to get a conventional mortgage loan increased from 620 to 680, which non-surprisingly made it difficult for some people to qualify for a loan.

“Fannie Mae and Freddie Mac looked at credit scores and loan performance and realized that borrowers with lower credit scores are far more likely to default on their loan than borrowers with higher scores,” says Douglas Benner, a senior loan officer with Embrace Home Loans in Rockville, Md. “As a result, credit score requirements are now stricter.”

Although conventional mortgage lenders aren’t likely to relax their standards anytime soon, there are options available if your score is too low for a mortgage.

1. Up your down payment. 

A conventional mortgage loan only requires a down payment of 5%. But if you were to put up a 10% or 20% down payment, this may sway the lender to approve your mortgage application if you have less than a 680 credit score. This doesn’t work in all cases, but worth a shot. Since you’ll have a larger stake in the property, you’re less likely to default on the mortgage loan.

2. Look into FHA home loans. 

Mortgage loans insured by the Federal Housing Administration require a minimum credit score of 620. This is good news if you’ve had credit issues in the past and you’re slowly rebuilding your credit score. As a bonus, these mortgage loans only require a 3.5% down payment.

3. Make needed credit adjustments.

Ask your lender, what do I need to do to get my application approved? If you’re right on the edge of a 680 credit score, something as simple as paying off your credit card or paying down your credit card balances might give your credit score a much needed push, helping you qualify for the mortgage.

Additionally, if you have negative erroneous information on your credit report, such as a late payment or a collection account reported in error, disputing and removing this information can add points to your credit score, increasing your chances of an approval.

4. Add a name to your mortgage application.

If you’re a husband applying for a mortgage loan in your name only – and your score is too low to qualify for a mortgage – adding your wife’s name to the application can help your odds – providing she has a high credit score.

When there are joint applicants on an application, mortgage lenders use the average of both credit scores to determine eligibility. If you have a 640 credit score, and your wife has a 740 credit score, that’s an average of 690.


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