What to do if your credit score is too low for a mortgage

If you're preparing to buy a home, you probably know that your credit score is important. Maybe you've already been turned down for a mortgage because of a low credit score. Or maybe you've recently pulled your credit report, only to realize that your credit is worse than you expected.

Don't give up on buying a home yet! There are plenty of places to turn if your credit is too low to get a conventional mortgage. But first, you should figure out what lenders expect of your credit score, since you might be surprised to find that you can indeed buy a home with your current credit score.

What do conventional lenders expect?

Lending requirements vary from one lender to the next, but they've generally become more strict since the subprime mortgage lending crisis in 2008. As a rule of thumb, though, you'll need a FICO score of about 650 to get a conventional mortgage – and that's on the low end.

Remember, the lower your credit score, the higher your mortgage's interest rate is likely to be. This can have a dramatic effect on how much you pay for your home over time. So if you're sitting on the mid-to-low end of the credit spectrum, you may want to look into some of these options, even if you qualify for a conventional mortgage.

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Put more money down

Mortgage lenders look at a host of factors when deciding whether or not to lend you money. One of those factors is your credit score. But another factor is your down payment.

With some lenders, you may be able to offset a weak credit score with a higher down payment. With a bigger down payment, you'll have more equity in your home, which means the lender takes less of a risk when lending to you.

If you've got a substantial amount of money in savings, but still have a fairly low credit score, consider applying for a mortgage with a smaller bank or credit union. Often, these smaller entities operate under more flexible lending guidelines, so you can talk to a loan officer about your situation and maybe get a favorable result.

Research non-conventional loans

Another option if you have a low credit score (and especially if you combine a low credit score and a small down payment) is to look into non-conventional loans. Non-conventional or non-conforming loans, such as the Federal Housing Administration loan, Veterans Affairs loan and U.S. Department of Agriculture loan, often have less stringent lending requirements.

For instance, you may be able to get a FHA loan with a credit score of just 580, as long as you can put 3.5 percent down. With a higher down payment of 10 percent, you may be able to get an FHA loan with even lower credit.

One other option is to talk with banks in your area about specialized lending programs. Some banks offer programs for lower-income, lower-credit homebuyers, which could lift credit restrictions enough for you to qualify.

Work with a homeownership counselor

There are some local and national nonprofits that offer homeownership counseling such as HomeFree-USA and HOPE NOW.

Nonprofits like these offer counseling to future homebuyers who need help raising their credit scores or navigating the homebuying process. It may take some time, but with the help of a credit and housing counselor, you can learn which steps to take to raise your credit score and apply for a home loan.

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Get your credit score up

You could also simply take the time to bootstrap yourself into a better credit score. Raising your score isn't complicated, but it does take time, discipline and hard work. These steps can help get your credit score up so that you can qualify for a mortgage:

1. Correct any errors on your report, especially late payments or collections accounts that aren't recorded properly.

2. Make all your payments on time. Late payments are the No. 1 way to ding your credit score.

3. Pay down revolving debt like credit cards. A high debt-to-credit ratio is another surefire way to lower your score.

4. Wait it out. As long as you're paying down debt and making payments on time, your credit score will eventually rise on its own.

Even if you decide to apply for a non-conventional loan or put more money down on your home, these are good credit health habits to start for a lifetime.

Abby Hayes is a freelance blogger and journalist who writes for personal finance blog Dough Roller and contributes to Dough Roller's weekly newsletter.

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