Getting a mortgage when your credit scores are low is expensive. Many would tell you it’s never a good idea to to it. Not I.
Sometimes, it just makes sense. Like when you get a new job in another city that pays much better. Or when you find a $250,000 house for $175,000 and you’re not going to risk losing the opportunity.
I mean, you know that in a few months you can refinance at a much better rate. Or you can just sell the house in a few months for full price.
Low Credit Score Mortgage Lenders
Finding Low Credit Score Lenders
The best way is by using mortgage brokers. And that’s not because the internet isn’t full of low credit score mortgage lenders but because mortgage brokers and their people know the quirks of those lenders.
First, low credit lending programs fall into two groups:
1. Government Backed (FHA), VA, USDA
There’s less risk in this case than with conventional programs, so rates are good, relatively speaking. Not as good as if your scores were high, but better than you’d get with conventional programs.
Also, down payments / equity requirements are low.
To quirks, now. Some have overlays (rules on top of the backing government agency’s rules), some do not.
One of the overlays? Some FHA lenders insist that, no matter what, the minimum down payment / equity be 10% while others will as low as 3.5%. That makes a big difference.
Another one, also with FHA, some will underwrite low-score mortgage applications only manually, which means, the expenses to income ratio drops from 56% to 43%. That’s a big difference.
Under the 43% limit, a borrower who’s monthly income is $5,000 and car and credit car expenses are $450/month, could buy a $195,000 house (if property taxes and property insurance were $600 and the rate was 5%).
Under the 56% limit, the same borrower could buy a $293,000 house (if property taxes and property insurance were $600 and the rate was 5%) assuming the same bad creedit score.
More risk means higher interest rates. But conventional also means no FHA or VA rules. So, more freedom. Of course, the freedom varies lender by lender, so a broker comes in handy.
Note: the Frank-Dodd mortgage reforms means that many of the conventional lenders will go to low scores and ‘creative’ features on investment properties only (Frank/Dodd does not apply).
A few will do owner-occupied too. A mortgage broker comes in handy here too.
By the way, with owner-occupied, counties have rules too. Cook County, IL, for instance, does not allow borrower’s closing costs to exceed 5% of the loan amount.