The latest numbers from mortgage analysts Ellie Mae show that the average FICO score of approved conventional mortgages is 732. If a borrower has low credit scores (650 and under), then that average FICO score could seem like a chasm between them and the home they want to buy. But just because the average credit scores for a conventional mortgage are above 732 doesn’t mean low-credit borrowers are shut out of homes.
There are a good amount of options, and the federal and state level for mortgages can help even low-credit borrowers get the home of their dreams. Here are three types of loans you may want to explore.
1. USDA Loans
USDA loans are a great option for borrowers with low credit scores, because the minimum score for approval is 640. Not only that, but you won’t have to make a down payment for this mortgage. It sounds like an incredible deal and, for the consumer with bad credit, it is a legitimate option.
However, borrowers need to know the very clear limits the USDA places on where homes can be bought. Because the program was initially started to provide economic stimulation in rural areas, only homes outside of urban areas are eligible for the USDA mortgage program.
As far as the hard numbers go, several sources indicate that the borrowers’ mortgage can’t be more than 29 percent of their income, and the overall DTI is 41 percent. Both home prices and borrower income are capped, and that cap depends on the area in which the borrower wants to buy.
To understand exactly where the urban limits are for the city in which you live, the USDA’s website has a straightforward mapping app that shows clear boundaries between urban and rural.