Your credit score and how it will affect your mortgage rate
The median FICO credit score in the U.S. is 723 (according to Fair Isaac and Company). That means that 50% of Americans have FICO scores below 723 and 50% have FICO scores above 723. But even if your score is lower you may still qualify for prime mortgage rates. Generally, if your credit score is below 620, however, you won’t be able to get a prime rate mortgage from the major lenders.
Why? As our article on your credit score explains, your credit score is an indicator of how likely you are to repay your debts; it’s an indicator of risk for lenders that are thinking about lending you money. The lower your score, the thinking goes, the less likely you are to repay your debts and, therefore, the more risky it is to lend money to you.
Other options for mortgage borrowing with a low credit score
But while major lenders (called A-paper lenders) may not lend you money for a mortgage if your credit score is below 620, another kind of lender – called a sub-prime lender – may. Sub-prime lenders specialize in lending money to people with lower credit scores.
If you take out a mortgage with a sub-prime lender, you’ll likely pay a higher interest rate than you would with a prime lender (anywhere from 2-6% above prime rate or more). And your loan may have more restrictions. But if your goal is to buy a house, it may be worth it.
How to get the best deal if you go sub-prime mortgage
Check out A-paper lenders first, even if your credit score is below 620. If you can get a loan through an A-paper lender, you’ll be much more likely to get a better deal. If you’ve talked to three A-paper lenders and haven’t had any luck, check with a few reputable sub-prime lenders.
To make sure that you get the best deal from a reputable lender that won’t take advantage of you just because your credit score is low, shop around.
Because you’ll likely pay a higher interest rate for a sub-prime loan than an A-paper loan, it may benefit you to refinance your mortgage once you’ve built up your credit score (which you can do by paying your mortgage on time every month and not taking on more debt). For that reason, try to get a mortgage without a pre-payment penalty.
