Qualifying for a mortgage is getting more difficult in today’s recessionary economy. In many cases, a low credit score of 560 will prevent you from qualifying for the mortgage you want.
Though the lowest credit score scale required for a mortgage is 620, it doesn’t mean owning your dream home is impossible. Sure you can be approved for a mortgage with a 560 credit score, but be prepared to pay a significantly higher interest rate as most lenders have to cover the risk of loaning to someone on a low credit score scale by charging a higher interest rate.
A credit score of 560 equates to high risk, so compared to someone with a score of 700 (and above which is considered a good score that yield favorable interest rates), you have to pay as much as 4 percentage points or more in higher interest rates.
The True Cost of Low Credit Score
|Your Score||Loan Amount||APR||Month Payment|
Source: MyFICO (Interest rates accurate as of March 26, 2010)
According to MyFICO, a division of Fair Isaac, a consumer with a FICO score between 700 and 759 might get a 4.981% rate on a $200,000 30-year fixed mortgage loan while those with a score between 620 and 639 might get a 6.348% rate on the same loan.
As you can see from the above table, an interest point or two make such a big difference in the price of the house. It means saving thousands in finance charges and a lower monthly payment. From the above example, paying an interest rate just 1½ point higher means paying an additional $200 each month on your house payment on the typical $200,000, 30-year mortgage loan. That’s at least $72,000 more you’re going to pay for your house!
Therefore, if you have credit score of 560 or lower, it may be in your best interest to wait until your scores improve. Failing to take steps to improve your score could easily cost you hundreds or thousands of extra dollars on your mortgage.
How to Get a Mortgage with a 560 Credit Score?
On the other hand, if you decide to get a mortgage with a 560 credit score, here are some possible steps you can take
- Offer a larger down payment so that you aren’t borrowing so much money
- Lower your debt-to-income ratio by paying off as much debt as you possibly can before applying for a mortgage loan in order to increase your credit score
- Don’t buy a car just before applying for a mortgage loan as it lowers your credit score
- Deal with a lender that specializes in bad credit mortgages
- Get a 3-1 credit report from the 3 leading credit bureaus and check for any update or error
- Most importantly, take proactive steps to fix your credit score
Although by law, you're entitled to receive a free copy of your credit report annually from any of the 3 credit bureaus - Equifax, Experian, and TransUnion, this free report will not reveal your actual credit score.
To view the actual score that the lenders are seeing, get your score (plus 3 in 1 credit report) from Free Score Finder and know know where your credit score stand.