Bad Credit: Common Misconceptions Regarding Mortgage Loans
December 19, 2018
What is the connection between a person's FICO credit score and his or her ability to get a mortgage? This is a common question for any prospective homeowner to ask, no matter what level of credit that individual has. You may be asking it right now as you inspect the mortgage options offered by a variety of lenders.
The speculation becomes even more urgent and complex when that credit score has been damaged over the years by any of a variety of financial incidents. Is there a cutoff level of scores that make people ineligible for loans? Will the terms offered change drastically based on a few points? Can this one three-digit number represent the difference between receiving a loan and being denied?
The official perspective
The Consumer Financial Protection Bureau has plenty of helpful advice for borrowers wondering what their FICO scores mean for their ability to receive a loan. The agency's first reminder is an important one: Lenders don't just look at one score to determine whether to issue a loan, though FICO score is a major part of their equation. There are numerous other financial markers to consider, including present amount of debt, total assets, savings and income.
The CFPB added that credit reports sometimes contain errors, and that the credit score presented can be affected by these issues. This means it's important to take a close look at this type of report and verify its information. Applying for a loan with an incorrect credit report may affect the lender's decision process.
The data that goes into a credit report and the related score includes debt, bill-paying history, number and duration of current loans, and the percentage of credit presently used. The agency noted that debt collection, foreclosures and bankruptcy can damage credit, but these events are tied to time - the impact of a financial problem will decrease as years pass.
Loan options that prove misconceptions false
Once you've learned what a credit score is based on and how lenders use the number, it's time to challenge credit myths head-on. Will a lower credit rating stop you from buying a home or getting a mortgage? Not if you work with the right company. For example, we offer a loan product called SmartTrac that is aimed at borrowers with credit scores of 620 and up, and does not exclude borrowers who have had financial issues such as bankruptcies, short sales or deeds in lieu.
Credit lower than 620 isn't a disqualifying factor, either. The Federal Housing Authority guarantees loan programs that suit borrowers with credit scores 500 and above. The debt-to-income ratio required to receive one of these loans changes based on credit score to ensure you're financially healthy enough for homeownership. This keeps your finances safe while disproving the myth that damaged credit alone can make a person ineligible for homeownership.
There are multiple ways to qualify for a loan and achieve the dream of homeownership. FICO credit scores represent one measure of a person's monetary health, but not the only one. It's important to remember this if you've been counting yourself out of the mortgage market because your score is low - there are other options to investigate.