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What is bad credit?

Ask a hundred lenders and you’re bound to get a hundred different answers. The truth is: you have dozens of credit scores, and they vary depending on the credit bureau and scoring model. It’s your FICO score, however, that really matters; 90% of lenders use this score when reviewing your application for a loan.

FICO credit scores are rated as followed:

  • 800 or higher: Exceptional
  • 740-799: Very good
  • 670-739: Good
  • 580-669: Fair
  • 579 or lower: Very poor

Most lenders consider 620 to be the lowest score you can have to get a traditional loan.  If your score is fair, you’re questionable in the eyes of a lender. Lenders consider you a higher risk, and if you’re approved, you’re subject to higher interest rates and fees. If you fall in the “very poor” category, your chances of getting approved for a loan are slim to nil.

But there are options for those of us with fair or bad credit, however.

FHA Loans

Even with a score as low as 580, you can qualify for an FHA mortgage with as little as 3.5 percent down. If your score is lower than 580, you’ll be required to put at least ten percent down. Five-hundred is the credit score cutoff for FHA loans.

There are a couple of downsides, however. You are required to pay an upfront mortgage insurance premium of 1.75 percent of loan value, plus monthly private mortgage insurance (PMI) premiums of 0.45 to 1.05 percent of the loan value. If you put less than 10 percent down, you’ll have to pay PMI for the duration of the loan. Plus, the loan amount is capped at $679,650.

VA Loans

If you’ve served time for Uncle Sam, you might qualify for a VA loan. VA mortgage lenders usually require a credit score of at least 620, but it is possible to find some that will accept a 580. You won’t need a down payment, but you do have to pay a funding fee, typically 2.15 percent of the loan value. Most loans are capped at $453,100.

Solve Credit Issues with Cold, Hard Cash

Offering 20% or more for a down payment lets a lender know that you mean business, and they may decide to approve your loan despite your less-than-stellar credit. Another bonus: you’ll also enjoy lower monthly payments, won’t have to pay for private mortgage insurance.

Lower Your DTI

The lower your debt-to-income, or DTI, the better. A low DTI means you’ll have more income available to handle a mortgage payment. Thirty-six percent is the ideal DTI ratio, but most lenders will accept a ratio as high as 43. A low DTI ratio may offset your bad credit and allow lenders to give you the green light on your loan.

Lower your DTI by either increasing your income (ask for that pay raise!) and/or paying off debt (or both).

Enlist A Co-signer

Do you have a close friend or family member that will co-sign on a loan with you? It might be your best option.

This person must be someone for whom you trust a lot and who trusts you in return, and here’s why: the mortgage might be in your name, but your co-signer will also be responsible for payments. If you start your slacking on your mortgage payment, your friend’s credit score also takes a hit. If you decide to stop paying your mortgage altogether (something I wouldn’t recommend), the lender could target your co-signer for the money.

Now that you have the facts…

We offer loans specifically designed for people with meh credit. Ready to take the next step? Click here to get started.

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