July 17, 2017 | Bob Myers
It's one of those home-buying riddles that many think is all  but unsolvable: How to get a mortgage with bad credit? After all, if  your credit score is abysmal, you may as well kiss your home-buying  dreams goodbye.  Right?
Wrong.  In spite of what you've heard, there is hope.
By "credit," of course, we mean your credit score—that  all-important numerical representation of your track record of paying  off past debts, covering everything from your credit card to college  loans. Mortgage lenders check your credit score to gauge how good you'll  be at paying themback, too, and a low credit score can definitely work against you.

According to a national survey by Experian, one-third of prospective  home buyers are afraid that their poor credit score might hurt their  ability to purchase a home.  Meanwhile, 45% of people polled say they've  decided to delay home buying until their credit score improves, with 1  in 5 believing they'll have to shelve the idea for at least five years.
Is  this true?  Exactly how bad is bad, anyway?  We'll set you straight  below, and offer some guidance on how to get a mortgage with  poor credit... or at least some direction.

How to check your credit score

Before you can explore your loan options, you need to assess what shape your credit is really in, says Todd Sheinin,  a mortgage lender and chief operating officer at New America Financial  in Gaithersburg, MD.  For starters, credit scores range from 300 to 850,  and are calculated based on the following factors:
  • Payment history: 35%
  • Debts owed: 30%
  • Length of credit history: 15%
  • Types of credit you have: 10%
  • Applications for credit: 10%
By law, you’re entitled to a free copy of your credit report once a year from each of the three major credit bureaus: Equifax, Experian, and TransUnion.

You  can request the reports through AnnualCreditReport.com. However, your  credit report only shows your credit history; to see your actual score,  you’ll need to pay a small fee directly through the credit bureaus’  websites. (Alternatively, you can get a free estimate of your score  through Credit.com, CreditKarma, or CreditSesame.)

If your credit score is 760 or above,  you’re considered a low-risk borrower—meaning you’re likely to get the  best interest rates and terms when you apply for a loan. Meanwhile, a  good score is from 700 to 759, a fair score is from 650 to 699, and  credit scores below 650 are deemed poor.

If your credit score is below 650, you may want to step back and take a few months to raise your score. But if you’re looking to buy a home right away, you do have options.

Option 1: FHA loan

If your credit is in rough shape, you might still be able to qualify for a Federal Housing Administration loan.  Because FHA loans were created for low- and moderate-income households  that would otherwise be locked out of the housing market due to subpar credit, qualifying credit scores start at 580 and up.  Another bonus: FHA  loans let you make a down payment as low as 3.5%.
The downside?  Because FHA loans are government-insured, borrowers must pay an upfront mortgage insurance premium.  Currently the fee is 1.75%—that’s $5,250 on a $300,000 home loan.  Borrowers will also have to pay annual mortgage insurance, currently  around 0.85% of the borrowed loan amount—or $2,550 more per year.  Also,  FHA loans are usually capped at $417,000. (In certain high-cost areas,  the limit is $625,000.)

Option 2: VA loan

Active and retired military are eligible for the VA loan offered  by the U.S. Department of Veterans Affairs. Not only do they accept  credit scores of 620 and below, but they require no down payment andno mortgage insurance premium—all at decent interest rates.
“Because  interest rates are fixed on VA loans, they’re not based on the  borrower’s credit score,” Miller says. In other words, having crummy  credit won’t prevent you from qualifying for a great rate.

Option 3: 15-year fixed loan

Good  news: Most conventional loans only require a minimum credit score of  620, based on Fannie Mae and Freddie Mac guidelines. However, "if you  have a 620 credit score, you're going to pay a higher interest  rate," says Heather McRae, a senior loan officer at Chicago Financial  Services.  But there is one interesting exception.
"If you get a  15-year fixed loan, the lender will essentially turn a blind eye toward  your credit score with respect to what interest rate you get," says  McRae.  In other words, for a 15-year fixed loan, you would qualify for  the same interest rate whether you have a 620 or a 750 credit score.
Granted,  you will still need to meet other requirements in terms of your income,  down payment, and other factors. Essentially, you'll need a solid  salary and plenty of cash upfront.  Still, it's a great option if your  past credit issues are haunting you, while your present circumstances  are solid and scream "All systems go!"

Option 4: A bigger down payment

Some mortgage lenders might be willing to approve you for a home loan if you make a larger-than-usual down payment.  Why?  Because "the more you put down, the more you minimize the risk to  the lender,”  says Sheinin.  So, by increasing  your down payment to 25% or 30% on a conventional loan—instead of the  standard 20%—you’ll strengthen your mortgage application.  Just bear in  mind your credit score can still negatively affect your loan's interest  rate.

Please   consider The Myers Team your resource for all things real estate.   We   have over 30 years of real estate experience, specializing in the   Montgomery County area.  If you are refinancing, want a recommendation,   need a service provider or just have a home related question, please   give me a call at  301-910-9910 or email me at bobmyersteam@gmail.com.
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