It’s a misconception that people with a low FICO score can’t get approved for a mortgage and hence can’t buy a house. But in reality, there are some government-backed mortgages that allow people with low FICO scores to purchase a house.
What is Considered a Low FICO Score?
To receive mortgage approval for purchasing a house, you must have a good FICO score. Because when the FICO score is low, it indicates that the person may not be able to repay the loan in time. That is why banks or lenders only approve mortgages when the FICO rating is high.
Although there are some lenders that approve a mortgage with a low FICO rating. However, here, you will have to pay high interest, and the mortgage duration will be less. So, what is considered a bad FICO score?
Usually, if you have a FICO score of less than 580, it is considered a bad or low FICO rating.
How to Purchase a House with a Bad FICO Score?
Available Loans for Purchasing a House with a Bad FICO Score
· USDA Loan
If you are planning to purchase a house in a rural area, this mortgage will be the best for you. It is a government-backed loan that will allow you to purchase a house with $0 down payment. Usually, it requires a FICO score of 640 to qualify for this loan. Apart from the FICO score, you may have to fulfill other income requirements.
· VA Loan
This mortgage loan is for the veteran or currently serving personnel in the US armed forces. Similar to the USDA loan, you won’t have to pay any down payment for the VA loan.
To get approval for this mortgage, your house must meet certain criteria. And if you meet these criteria, you can get approval for the VA loan even when you have a FICO score of 580.
· Federal Housing Administration or FHA Loan
This mortgage is created for first-time home buyers. To get approval for this loan, you must have a FICO score of 500. However, you can use this mortgage only for a primary residence. If you have a house already, you won’t get approval for this FHA loan.
3 Factors that Determine the FICO Score
· Bank Account History
Your bank account history plays a significant role in determining the FICO score. For example, your total debt, how often you pay the bills, the duration of the loans, etc. If you have past due bills or have high debt, it will downgrade your FICO rating.
· Credit Utilization
Credit utilization indicates how much credit you have used from your allocated credit. If you have maxed out all your available credit, it will decrease the score.
· Credit Inquiries
Apart from the above factors, credit inquiries by lenders will affect your FICO score.
Conclusion
When you have a bad FICO score, it limits the options of getting mortgage approval. That is why you should try to improve the FICO score and open more mortgage options.
