Sometimes, looking for 580 credit score mortgage lenders makes perfect sense, like when you’ve found a $200,000 house for $150,000.
Sometimes, even in such situations it does not make sense. Because, for many borrowers with 580 middle FICO score, a much better score is right around the corner.
Low Credit Score Mortgage Lenders
Finding 500 Credit Score Mortgage Lenders
The best way to find lenders who work with borrowers with scores in the 500’s is to talk to a loan officer that works for a mortgage broker.
What Do When You Have Low Credit Scores
To lenders, low credit scores are riskier than high low credit scores. They, therefore, charge more to lend to people with low scores.
But low credit scores are not written in stone, they can be changed. Your duty to yourself is to determine how much and how fast you can increase your scores and compare that to getting a loan right away.
For most people, it makes sense to wait a bit, raise the scores. Most people, however, do not know how to do it.
One choice is to hire a credit repair company (some are good, some average, some are not good, so shopping around is required).
Another choice is to talk to do it on your own.
Another choice is to talk to a loan officer. Some analyze your credit report and tell you what needs to be done, and you go do it. Some send you to a credit repair company they work with. If you trust the loan officer, you might feel okay working with their credit repair company… you might want to check them out.
Low Credit Scores to Decent Credit Scores in a Week
If your scores are low because you’ve been late (or not paid at all) a bunch of times, you have to wait to see your scores up again. However, if they are low, at least in part, because you carry too much debt in relation to the available credit, you can see them shoot up 50 or 60 points pretty fast.
Because credit scores are determined, among other things, by the amount of debt in relation to available credit.
Which means that, if you can pay down some of your credit card, you can have your scores go up fast. (If you pay for rapid re-scoring, you can have it done within 5 business days.)
Rapid re-scoring requires you have receipts to show you made the payments and the new balance.
Well, if your credit scores are really low, in the low 500’s, for instance, a 50 or 60 point jump will not get you decent scores.
But it will improve your chances of getting a loan: there are more lenders that lend if scores are 580 or higher than lenders that lend to 500-579.
If the 50 or 60 point jump gets your middle score to make it to 620, you have even more choices (because more lenders lend to 620 and higher than to 580-619).
It will improve the interest rate you get too… Not a lot, but mortgage loans come with this powerful tool: compound interest. (It’s a tool that favors lenders, but still a tool.)
So, over a long period of time, 0.25% of 1 percent ends up meaning real money.
Borrowing $200,000 (fixed-rate, amortized over 30 years) at 4.5% means that your monthly payment is $1013.37 and that, by the end of the 30 years, you’ve paid $164,813.20 in interest.
Borrowing the same $200,000 (fixed-rate, amortized over 30 years) at 4.375% means that your monthly payment is $998.57 and that, by the end of 30 years, you’ve paid $159,485.20 in interest.
Borrowing it at $4.250% (same amortization, fixed) means that your monthly payment is $983.88 and that, by the end of 30 years, you’ve paid $154,196.80 in interest.
Sometimes, people err by making too much of a fuss over 0.25% interest rate difference; sometimes, they don’t making enough.
By that I mean, sometimes, people keep not buying a house (or refinancing one) because they want a rate that’s 0.25% lower and they wait, and wait, and wait, and rates go up, not down.
On the other hand, there are people who accept a rate a bit higher than they should because they think they’ll get a raise or another job, and that does not materialize (or materializes much later) and they end up struggling, paying late fees, and getting stressed.
On top of that, they don’t shop for a lender properly, but of that later.
Low Credit Score Mortgage Loans – The Big Problems
The biggest problem with getting a mortgage while your credit scores are low is the small loan amount you can borrow (compared with what you could borrow if your FICO middle score were ‘normal.’
If your scores are under 640 or 620 (depending on lender), you have to go FHA (unless you can get a VA loan). Not only does FHA has upfront mortgage insurance and monthly mortgage insurance premiums (regardless of the LTV (loan-to-value ratio) that, currently doesn’t go away till the loan is paid in full), but the FHA requires that low-credit mortgage applications like these be underwritten manually.
Manually underwritten loans have lower DTI (debt-to-income ratios) than the ones underwritten automatically.
There are 2 DTI’s: front and back.
The front ratio compares your housing costs (monthly principal, interest, property insurance, mortgage insurance, property taxes and home owner’s association, if any) to your pre-tax monthly income.
For manually-underwritten loans, all those expenses cannot be more than 36.999% of your monthly income. Manual underwriting allows them to be as high as 46.999999%.
In other words, only $369.99 of every $1,000 of income can be taken up by housing expenses if manual underwriting is involved not $469.99.
The back ratio takes into account you all your debt payments (all housing payments plus the minimum payments you must make on any other loan – credit cards, car loan, etc.).
Manual underwriting limits this ratio too. Some lenders will only go as high as 43%, some go as high as 50%. But the one you get when your credit scores are high enough for automatic underwriting is 56.9999%.
So, depending on lender, $430 to $500 of every $1,000 of pre-tax income you have can go towards your debts, compared to $560.
In practice, that means that you can buy tens of thousands of dollars more house with ok and good credit than you can with bad credit. Usually, tens of thousand of dollars means either a much bigger property or a property in much better condition.
If your loan amount is low, you might not qualify even if your DTI ratios are fine: the APR (annual percentage rate) or the total fees and points might be too high for the loan to be a Qualified Mortgage (type of mortgage that meets the Frank-Dodd Act requirements).
Your APR (annual percentage rate) cannot be more than 1.5% higher than the APOR (Average Prime Offer Rate) for first-lien loans (2nd lien loans can have it be 3.5% higher), and the points and fees you pay cannot be more than 4.99% of your loan amount for the loan to be a QM loan.
Many lenders do not offer non-QM loans.
The above means that you’d have to find a lender that does offer non-QM programs. Those programs come with higher interest rates. (Which means you either don’t qualify or your rate will be several points higher than if the loan had been a QM loan.)
Last, but not least, when manual underwriting comes into play, the minimum down payment amounts are higher.
How much higher, 3 times or higher. For FHA loans, for instance, the minimum down payment becomes 10%. For other loan programs, it goes from 5% to 15% or 20%.