Consumers with low credit scores tend to feel as if they will not be able to get a mortgage with today’s strict guidelines on mortgage lending. Luckily, this is not true; there are many lenders that are willing to overlook a low credit score as long as there are other compensating factors that can put the pieces of the puzzle together. The entire economy went through a slump, which affected millions of people and banks understand that. They are willing to take a thorough look at everything in a person’s file before deciding whether or not they are eligible for a mortgage loan based on credit score alone.
Compensating Factors Help
When a borrower has compensating factors to help build up their loan application, they are more likely to be evaluated on everything, not just their credit score. A few compensating factors that banks look for include: assets, steady income and steady employment. A bad credit score is not indicative of a person’s credit history if they were part of a company downsizing or had their wages cut drastically without notice. When compensating factors are in place, there is a possibility that a bank can overlook the poor credit score. Think of your application as a puzzle with many pieces that the bank must put together to determine whether or not you are eligible for a loan.
Understanding the Low Credit Score
Credit scores all have stories behind them. They are more than just a cut and dry number that lenders look at to approve or deny a loan. A low credit score could occur solely because of the recent dip in the economy or as a result of a string of bad financial decisions. Lenders will take a look at the credit history, going back as far as a few years ago to determine why your score might be so low. If the late payments or collections did not begin until the economy started going down and the situation was only temporary, your credit score might not play as an important role as your credit history. If you apply good evidence and written reasons for your poor credit score, they are more likely to be looked over than if you submit the application with your credit without explanation, letting the numbers speak for themselves.
Avoid Automated Underwriting
If your credit scores are below 650, you should ask about your eligibility for manual underwriting. With this type of underwriting, you are more likely to be able to explain your poor credit score and talk to the loan officer about your credit history. If you can show that before you fell into financial trouble with the economic crisis that we all experienced and that your credit issues were an isolated incidence during that time period, you might become eligible for a loan that automated underwriting would automatically decline. This might mean that you have to deal with a slightly higher interest rate or not get the exact terms that you desire that you would get from a Fannie Mae or Freddie Mac backed loan, but you will be able to get a loan.
Show that you are Educated
After the housing crisis, the government started providing proper education for potential homeowners. Understanding your mortgage, what you are getting into and what it means for your future can weigh heavily on your ability to get a mortgage now. If you have a low credit score, yet you show that you fully understand a mortgage and can afford the payments, you might be more eligible for the loan. This does not mean that anyone with bad credit can simply get educated and get approved, but it will increase your chances, should you have other compensating factors to make up for your low credit score.
Even though lending restrictions have gotten tighter over the past few years, it does not mean that it is impossible to get a mortgage with low credit scores. If you work closely with your lender, explaining your reasons for your low credit, showing that the situation was temporary and ensuring the lender that you fully understand the ramifications of getting a mortgage, you might be more eligible than you think for a new mortgage.Click to See the Latest Mortgage Rates»