At one time, a lackluster credit score was not much of a barrier to homeownership. Subprime mortgage lenders were willing to extend a mortgage, even under questionable circumstances. Underwriting standards have tightened up considerably, however, since the housing market shakeup that started in 2008. As a result, your creditworthiness must be stronger than before.
Minimum Credit Scores
Most lenders won't even consider you if your credit score is below 620, as of 2011, according to the Bankrate website. If you are around that level, you will be considered for a loan, but you will probably have to contend with a high interest rate. In addition, you may have to pay points and provide a large down payment. To qualify for the best rates on a 30-year, fixed-rate mortgage with no points, you will probably have to have a score of at least 760, according to the same source.
In the Past
If you've had bad credit in the past but have improved in recent years, you may be surprised to find a favorable reception from many lenders. Lenders will take note of your mistakes in the past, but as of 2011, they're much more concerned with your recent record and your current score. If you can show at least three years of improving credit and a good payment record, you should be fine, according to Bank of America's Mortgage Education program.
FHA-Backed Products
If you don't have a stellar long-term credit record, consider a government-backed loan. The Federal Housing Administration, or FHA, can act as a guarantor to your loan, making you more attractive to private lenders. An FHA-backed loan also requires a smaller down payment. To be considered for an FHA-backed loan, you must have at least one year of acceptable credit with a good payment record.
Improving Your Credit
A mortgage is probably the biggest debt you'll ever take on, and it's worth spending time preparing for it by improving your credit. Plan at least a year out. Take steps to repair your credit before you go loan shopping. The first step, according to MSN Money, is to order your credit reports and see if all the information on them is accurate. Dispute any errors. Set up automatic payments for as many of your accounts as you can to avoid missing any deadlines. Focus on paying down any unsecured debt such as credit card balances. Don't open any new credit card accounts.
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