What home loans can you get with a low credit scorce?

You may have found your dream home, saved up for a down payment and budgeted to ensure you can afford the mortgage payment. However, your credit is less than perfect.

You still have options. Find out how your credit affects your borrowing power and learn about some of the best home loans you can get with a lower credit score.

What does your credit score mean?

Your credit score is a number that reflects your creditworthiness. Banks, credit unions and other financial institutions use your credit score to determine your risk level as a borrower. To calculate your credit score, credit bureaus use formulas that weigh factors like:

• How many loan and credit card accounts you have and the remaining balances
• The age of your loan and credit card accounts
• If you pay your bills on time
• The number of times you've recently requested more credit

It's easy to assume that you have just one credit score, but that isn't the case. In fact, several organizations have their own credit scoring models. Lenders may rely on one or more to assess your creditworthiness. Lenders use credit scores to determine which home loans borrowers qualify for. In most cases, borrowers with a high credit score are eligible for home loans with lower interest rates and more favorable terms.

Home loans for borrowers with low credit scores

If you have a lower credit score, you may not qualify for a Conventional home loan. Instead, you might need to consider one of these mortgage options.

1. FHA loans

The U.S. Federal Housing Administration (FHA) offers government-backed home loans with more lenient terms. FHA loans typically require a fair credit score of 580 or higher. However, you don't have to make a large down payment. Instead, the minimum down payment for an FHA loan is 3.5% of the purchase price. Some lenders may offer FHA loans with a score of at least 500, or if you have no score but can establish a non-traditional credit history, a loan with a down payment of 10%. Approved FHA Lenders may set more restrictive credit score requirements, contact your Home Lending Advisor for current information.

To offset the risk that borrowers with low credit scores can bring, FHA loans require a mortgage insurance premium (MIP). The upfront MIP is 1.75% of the base loan amount and can paid in cash or financed into your now loan, while the annual MIP is between 0.15% and 0.75% of the average remaining mortgage balance and is included with your monthly mortgage payment. Contact your Home Lending Advisor for current information.

2. VA loans

If you're an active duty servicemember, retired veteran and/or member of the National Guard or Reserve, you could qualify for a U.S. Department of Veterans Affairs (VA) loan offered by a VA approved Lender. VA loans generally don't require a down payment and provide loan options with no minimum credit score requirements. Approved VA Lenders may set more restrictive credit score requirements, contact your Home Lending Advisor for current information.

Like FHA loans, VA loans come with additional fees. Most borrowers have to pay a one-time funding fee between 1.25% and 3.30% of the loan amount. Check with your HLA for current information. Borrowers who make larger down payments and who are applying for their first VA loan typically pay the lowest funding fees. However, VA loans do not require a monthly Mortgage Insurance payment.

3. Grant programs

Many state, county and city government agencies offer grants, vouchers and other programs to assist borrowers with low credit scores. Check for local mortgage grants and housing assistance programs in your area.

What's considered a high credit score?

Per the Consumer Financial Protection Bureau (PDF),credit scores between 660-719 are considered prime and credit scores of 720 or above are considered super-prime. Lenders may determine their own limits when establishing minimum scores they will lend on.

What's considered a low credit score?

Per the Consumer Financial Protection Bureau (PDF),credit scores of 620-659 are considered near-prime and credit score 619 and below are considered subprime. Lenders may determine their own limits when establishing minimum scores they will lend on.

What other factors do lenders review?

Your credit score is an important part of your loan application, but it isn't the only factor that lenders consider. They also review:

• Income and debts: Most lenders require a DTI of 43% or less. To determine your DTI, lenders divide your mortgage payment and recurring monthly debts by your monthly pretax income.
• Down payment: The larger your down payment, the better chance a lender will consider your application. While there are low down payment options at least a 20% down payment will also help you avoid paying private mortgage insurance. You can calculate this percentage by dividing your down payment by the lesser of the appraised value or purchase price.
• Assets: In some cases, lenders require you to have assets in reserve after closing on your loan so you can continue making your monthly mortgage payments. Most bank accounts, stocks and bonds count as assets.
• Work history: Most lenders prefer borrowers with steady income sources and employment. They may require you to have been on your current job or in your current job field for at least two years.

What to consider when applying for a home loan with a low credit score

If you do apply for a home loan with a lower credit score, make sure you consider these factors:

• Your credit score may be affected when you apply. . A home loan application shows as a hard credit pull on your credit report. This credit pull may affect your credit score.
• You can lock in a low interest rate. If you want to buy a house when interest rates are particularly low, acting sooner rather than later may be a smart idea. Waiting longer to apply could mean getting a loan when interest rates and monthly payments are higher.
• You may need a large down payment. To offset your credit score, lenders may require compensating factors such as a down payment of 20% or more of the purchase price.
• Your lender may have stricter income or asset requirements. To make up for a low credit score, your lender may require a lower DTI ratio or significant assets in reserve.

How to improve your credit score

Even if your credit score is low now, it doesn't have to stay that way. Use these tips to improve your credit score:

• Make loan and bill payments on time. Start by paying every bill by its due date. Over time, your good payment history can increase your credit score.
• Pay down debt. If you have significant credit card balances or other debt, paying it down can increase your credit score. You can follow the snowball method, which involves paying off your smallest balances first. Alternatively, you can try the avalanche method, which involves paying off high-interest balances first.
• Keep older accounts open. After paying off a credit card, resist the temptation to close the account. Keeping older accounts open gives you a longer credit history and lower credit utilization ratio, both of which can improve your credit score.
• Stop applying for credit. Multiple hard credit pulls can lower your credit score. When every point counts, avoid applying for credit.
• Correct credit report errors. Credit reports can contain mistakes that can lower your score. Start by checking your credit score for free and reviewing your report for mistakes. Contact the credit bureaus directly to dispute errors.

Just because your credit score is less than perfect doesn't mean you can never get a mortgage. Speak to a Home Lending Advisor to find out which home loans you're eligible for and work together to decide whether you should apply for a mortgage now or wait until your credit score is higher.