Mortgage Loan Approval and Bad Credit

By: Jorge Lopez, October 5, 2015

Perhaps the most critical step in applying and being approved for a mortgage is determining your creditworthiness.  Most people believe that having bad credit automatically removes the possibility of achieving homeownership, but that is not necessarily the case.  Even if your credit score is as low as 620, there is a possibility of being approved for a mortgage, if you’re up for doing the legwork and jumping through a couple of hoops.

If your credit score is actually lower than that aforementioned 620, your options in terms of finding a lender are relegated to the Federal Housing Administration.  Fannie Mae and Freddie Mac will also be willing to extend you a conventional loan if your score is at least 620 or better.  However, if your score is below 600, then you are out of options, at least until your score improves.

Remember that the lower your score is, the more scrutiny and time it will take before a lender is willing to give you a mortgage loan approval.  To avoid the possibility of default, a lender will require that your debt-to-income ratio be at least 43%.  What this means is that your current debts such as your credit card balances, vehicle loan, and the monthly payments you will be making on the home must not exceed 43% of whatever your total monthly income is.

There are other stipulations and requirements that you’ll need to deal with, like higher rates and pricing and the possibility of having to attend a homeownership counseling course before moving forward.  However, if you do receive approval and manage to make your monthly payments, you should see your score begin to improve, allowing you a greater amount of options such as refinancing for a better rate.

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