Q: I have a poor credit score (614). Is it possible for me to get a home buyers loan?
A: It is technically possible for you to get a mortgage to purchase a home. The FHA program is theoretically open to borrowers with credit scores as low as 580 and a down payment of just 3.5 percent (plus an up-front insurance premium of 1.75 percent of the loan amount).
However, in reality, many lenders won't write FHA mortgages with FICO scores below 620, even if the FHA will accept them. These add-on requirements (over the program minimums)--called "overlays"--are added by lenders who are afraid that low-credit-score loans will fail at a rate high enough as to bring down the wrath of the FHA upon them. A lender whose loans fail at a significant rate can even lose their ability to participate in the FHA program, so it's little wonder they are acting defensively and instituting their own overlays.
Since your 614 score is not too far away from the minimums many mortgage lenders will consider, your first move should be to take a look though your three credit reports to see if there are any errors or omissions you can correct which might improve your score. Since you are close, it shouldn't take too much time or effort to get you over the 620 barrier.
Here are a few strategies that can help boost your credit score in just a short period of time:
- Pay down your balances. Paying down debt is by far the simplest way to improve your score. "People with the highest FICO scores carry balances on their credit cards that are less than 20 percent of their total available credit," says Anthony A. Sprauve, director of public relations for MyFICO.com in San Francisco. "Your balances account for 30 percent of your credit score."
- Use that old credit card…once. If you have an older credit card account with no recent activity on it, use the card once then immediately pay off the balance.
- Don’t close your old accounts. While you may think you’re doing the right thing by closing old credit card accounts, the opposite is actually true. Experts say that it’s equally damaging to open new, unnecessary accounts than it is to close accounts. If you have old or unused accounts, continually monitor your credit reports to keep your eye on them, but keep them open.
A 25-year expert observer of the mortgage and consumer debt markets, Keith Gumbinger has been cited in thousands of articles covering a wide range of consumer finance and economic topics in outlets ranging from the Wall Street Journal to the Bottom Line newsletters. He has been a featured guest on national broadcasts for CNN, CNBC, ABC, CBS and NBC television networks and has been heard on NPR and other national and local radio programs. Keith is the primary researcher and writer for HSH.com's MarketTrends newsletter and has authored or co-authored a number of consumer guides on mortgages, home equity, refinancing and more.