Can I Buy a Home With a Low Credit Score?

QUESTION: My credit scores vary from 620 to 638. Can I qualify for a home loan to purchase a home? I’ve been at my current job for five years and a couple of months.

ANSWER: You obviously are aware that your credit score is an important factor in whether you can qualify for a mortgage. In addition, if you are applying for a conventional loan, your score will impact the interest rate you will pay to borrow money. Most conventional lenders require a credit score of at least 700 to qualify you for a loan, although some will approve loans for borrowers with lower scores if they are making a bigger down payment, have a low debt-to-income ratio and an explanation for the low score—such as medical bills from an illness, unemployment or a divorce. Lenders are more lenient with borrowers who apply for an FHA (Federal Housing Administration) loan because the federal government provides insurance for those loans. Even so, few lenders qualify borrowers with a score under 640 for an FHA loan.

You mention your job history, which is an important positive factor in your chances of a loan approval. In addition, lenders will look at you more favorably if you can make a down payment of at least 20% or more, and if you have significant cash reserves you can tap into in event of an emergency. Most lenders will only approve borrowers with a maximum debt-to-income ratio of 43%. In fact, that’s one of the new “qualified mortgage” rules that went into effect Jan. 10.

You don’t mention anything about your debt situation, but the fact that your credit score is so low tells me you may have too much debt or have had problems paying your bills in the past.

The only way to find out for certain if you can qualify for a mortgage is to meet with a lender who can give you a pre-approval for a loan based on full documentation of your income and assets. However, your chances will be better if you can improve your credit score. I’m concerned that your low credit score indicates financial problems, so it would be best to address those issues before attempting to buy a home. Improving your credit may take some time, so the sooner you begin working on it, the better.

According to MyFICO.com, your credit score is based on several factors:

§  35% is your payment history—you can improve this by paying all bills on time and bringing all accounts up to date and below the credit limit.

§  30% is your amount owed—it’s best to keep credit card balances low, preferably at 25% of the credit limit, and to pay off your debt rather than consolidate it. Don’t close any credit cards because that reduces your available credit, and don’t apply for new credit.

§  15% is your length of credit history—once again, keep old credit cards open but don’t open a lot of new ones either, because that would increase the number of accounts with a short history.

§  10% is about new credit—if you’re shopping for a home loan or a car loan, try to search within a short time frame so it’s clear you’re looking for only one new loan.

§  10% is about the type of credit you have—it’s best to have both a credit card and an installment that you pay on time to show you can responsibly use credit.

If your credit score is low because of past collection problems, judgments or a bankruptcy, those items won’t come off your report for seven to 10 years. However, your credit score will gradually improve, even during that time, as you begin to use credit wisely.