Would-be homebuyers with battered credit will continue to have a tough time getting a mortgage this year, experts said.
“Below [a credit score of] 620 there are not a lot of places people can go,” said Kevin Retcher, owner of Alexandria-based First Meridian Mortgage Corp. “[For] anything below 740 there are pricing implications. We fundamentally have just gone back to the way it was [before the housing boom].”
People who have mitigating factors, who can provide an explanation for their poor credit and who have a lower debt-to-income ratio, might be able to get a Federal Housing Authority-backed mortgage with a credit score as low as 580, Retcher said.
John Ulzheimer, president of consumer education for credit.com, said poor credit can be a “deal killer” and even if someone with poor credit can get a mortgage, they will not get great interest rates and may have to put more money down.
“It doesn’t matter if you’re a millionaire, if your credit score is in the 500s, good luck,” he said.
A high interest rate over 30 years pulls a lot of money out of a family’s pockets. People with poor credit would be better off renting until their credit score improves enough so they won’t have to pay higher interest rates, Ulzheimer suggested.
Lenders have moved the bar for what they will take and still grant a mortgage.
Homebuyers with previous credit missteps are going to have to defend themselves when applying for a mortgage, said Amy Crews Cutts, deputy chief economist at McLean-based Freddie Mac.
“We got away from that — deciding all they needed was good credit score,” she said. Credit scores certainly are used but there are other factors and the “three Cs” of lending are capacity, collateral and good credit practices.
Improving a credit score takes time. People who turn to credit-repair or debt-settlement firms for help before they apply for a loan are paying for work they could do themselves, Ulzheimer said. It is not necessary to have an intermediary to challenge and correct erroneous data on your credit report.
A Google search for “bad credit mortgages” shows Web sites for companies that purport to help people with poor credit obtain loans. Consumers evaluating these providers, or any other lender, should visit the Nationwide Mortgage Licensing System and Registry to verify licensing and learn more about the lender, Retcher said. Companies and individuals must both be licensed.
However, even with that information, experts advise homebuyers to be cautious when considering online lenders that focus on people with credit problems.
“It’s a precarious situation for someone and they’re easily taken advantage of,” Retcher said.
