Qualifying for a mortgage takes a good credit rating, a proven ability to repay and some cash. The easiest home loans have lenient credit score requirements. However, the lower your credit score, the more you may need for a down payment, to compensate. Low credit scores also result in higher interest rates and fewer loan options. The Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture have relatively easy qualifying criteria and the VA and USDA don't require a down payment. Some conventional lenders also make it easier to qualify.
Finding FHA, VA and USDA Lenders
You can only obtain an FHA, VA or USDA mortgage through approved lenders. The federal departments that oversee these programs allow banks, credit unions, mortgage brokers and other lending institutions to participate based on their lending track records and financial capability. Approved lenders must follow certain guidelines for processing applications, underwriting and funding the loans. They also receive an insurance or guarantee which reimburses them if the borrower defaults. You can find a current list of FHA lenders and USDA lenders online.
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Tolerance for Bad Credit Varies
FHA, VA and USDA lenders can impose stricter credit standards on top of the official guidelines. These requirements, known as overlays, can make it harder for you to qualify for the same loan, depending on the lender. For example, the FHA officially allows credit scores between 500 and 579 if you have a 10 percent down payment. It allows borrowers with scores of 580 or more to qualify with just 3.5 percent down. However, FHA lenders often require at least a 620 and won't consider lower scores, regardless of the down payment. FHA loans also require mortgage insurance, which you pay monthly.
Although the VA and USDA don't have minimum credit score requirements, VA lenders usually require at least a 620. USDA lenders typically require a 640 credit score and may allow higher debt loads with a 660 or higher.
Conventional Loans Compete
Fannie Mae and Freddie Mac began offering 3-percent-down-payment loans in 2015 to better serve low- and moderate-income buyers. Fannie's MyComunityMortgage and Freddie's Home Possible Advantage are for first-time homebuyers and require completion of a homeowner education. Both programs allow credit scores down to 620, but require a higher down payment if you have a gifted down payment or certain other risk factors. Conventional loans that are easier to qualify for also require private mortgage insurance to reimburse lenders in case you default.
Past Credit Problems Not Created Equal
The seriousness of your credit problems also affects ease of qualifying. For example, bankruptcy and foreclosure not only dramatically lower your score, they are red flags for lenders. You must wait at least one year to get an FHA loan after a bankruptcy or foreclosure, and up to three years, depending on the type of bankruptcy and the circumstances surrounding your mortgage default. VA and USDA lenders also impose similar seasoning requirements after serious credit delinquencies.
Late payments on credit cards and other recurring credit accounts also raise red flags, but don't typically have as much bearing as mortgage default. For example, lenders may allow a 30-day late payment within the past year, or even a 60-day late within the past 12- to 24-month period.