While it may be more difficult to get a home loan approved with a poor credit score, some lenders do have options for people with lower scores.

Loan Types

FHA

This government-backed program was started as a means of encouraging homeownership by making lending to individuals with poor credit and/or lower incomes more appealing to banks.  

Many banks take part in lending that’s insured by the Federal Housing Administration. They agree to lend money because they know they can recoup potential losses because FHA loans are backed by the government.

Since it reduces any risks they take on by loaning to individuals or securing loans on properties that are considered “riskier” than others, they’re more willing to lend than they might otherwise be.

If you intend to obtain an FHA insured loan, expect to put down at least ten percent (10%) if your credit is between 500 and 580. For a credit score of 580 and up you can put as little as 3.5% down, so as you see, if you’re close to 580 right now, it might be worth it financially to put off getting a home loan until you’ve pushed your scores up a bit.

If you have a poor credit score because you’ve never built up a credit history, the bank will likely assign a manual underwriter to review alternative forms of credit such as phone bills, rental history, utility payments, etc.

This means that with real, live people reviewing your loan application (instead of a computer), the underwriter will be able to review these other mortgage-qualifying factors that prove your creditworthiness.

If your poor score is due to circumstances beyond your control such as a job loss, or divorce, you’ll be able to explain to the underwriter the reasons for your low credit score which can help prove your case.

VA

VA home loans were created with the intention of helping service members, veterans and eligible surviving spouses become homeowners.

Unlike FHA loans, lenders who offer VA home loans prefer to see credit scores of 620 and up, but in some cases, lenders have agreed to lend to individuals on the cusp of a “poor” FICO score at 580.

If you qualify and you want to obtain a VA loan, you might want to work with a mortgage broker who can help advise you on your best options.

Portfolio Loans

A portfolio loan is one wherein the bank or credit union keeps the loan they make to you “in their portfolio”.

In other words, they will never sell your loan to another lender…every mortgage payment you make will be to them until you’ve paid off your home loan.

The benefits of this type of arrangement are clear; the small, local bank or credit union wants to see their community grow, so when a fellow community member needs help, they know they’ll have a customer for life.

Because this type of loan will be manually written and won’t have to fit the FNMA, etc. guidelines, your bank will have control of their lending decision (hence the reason why they can look beyond your current credit score if they choose to).

Be aware that getting a home financed when you have poor credit will end up costing you more in terms of higher fees. If you are able to put off purchasing (or refinancing) until you’re able to improve your credit score, it could save you thousands of dollars over the life of your loan.

Bottom line, the difference of just a few points could result in a big savings.