If you have a low credit score should you apply for a mortgage now or wait until your score improves?

By Michael Jensen, Mortgage and Finance Guru

Edited by Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Updated October 20, 2020

The answer to your question depends on several factors including what your credit score is and if you can qualify for the mortgage you want now. We review these factors below so you can decide the approach that works best for you.

The first point you need to determine if you want to have the option to apply for a mortgage is do you meet the minimum credit score requirement, which varies by loan program and lender. If your score is not high enough then you are not eligible for the program and you know you need to wait until your score improves before you apply.

The minimum credit score required for an FHA mortgage is 500 if you make a down payment of at least 10% and 580 if you make a down payment of between 3.5% and 10%. The minimum credit score required for a conventional mortgage is 620 for the HomeReady program and higher for other programs.

We should highlight that you may also be able to qualify with a lower or no credit score under certain circumstances but this process -- called manual underwriting -- requires extra time, effort and documentation from both you and the lender. It is more challenging to get approved for a mortgage this way and not all lenders are willing or able to work with applicants that require manual underwriting.

Assuming you do meet the credit score requirement, your next step is to understand how your score affects your mortgage terms and the loan you can afford. Depending on your loan program, you may be required to pay a higher mortgage rate which impacts the loan amount you qualify for.

With a conventional mortgage, the lower your credit score, the higher your interest rate and monthly payment. For example, the rate for an applicant with a 640 credit score may be approximately 1.000% higher than the rate for an applicant with a 740 score.

The higher your mortgage rate, the lower the loan amount you can afford. So if your credit score is low, make sure that you can qualify for the mortgage you want and afford the higher monthly payment.

Use ourMORTGAGE QUALIFICATION CALCULATORto determine what size loan you can afford

The good news is that FHA mortgage rates do not change based on your credit score so the rate for a borrower with a 580 score should be the same as for a borrower with a 680 score.

This is why many applicants with lower credit scores choose an FHA mortgage. Additionally, FHA rates are generally lower than conventional loan rates -- because the program is insured by the federal government -- which also boosts the mortgage you qualify for.

The table below shows FHA mortgage rates and closing costs for leading lenders in your area. We recommend that you shop multiple lenders to find the best mortgage terms.

There are a couple of points to keep in mind if you decide to go with an FHA loan. First, the program requires you to pay an upfront and monthly mortgage insurance premium (MIP) which increases your closing costs and ongoing payment.

The ongoing fee partially offsets the lower mortgage rate you pay and reduces the loan amount you are eligible for. Plus, unlike private mortgage insurance (PMI) for a conventional loan, the monthly FHA insurance fee is non-cancellable in almost all cases.

Another consideration with an FHA mortgage is that the program applies loan limits based on your county and the number of units in the property. It is important to make sure that the mortgage amount you want does not exceed the applicable loan limit.

Use ourFHA LOAN LIMIT CALCULATORto determine the limit for your county

If after reviewing conventional and FHA mortgage options you determine that your credit score is preventing you from qualifying for the loan you want, you can always wait until your score improves before you apply.

Although it may take time to see the results, paying your bills on time, reducing your credit utilization and potentially closing selected debt accounts if you have too many open are all ways to lift your score. Additionally, resolving open credit issues such as accounts in collection or other delinquencies are also ways to potentially increase your score.

Review How To Improve Your Credit Score Before You Apply for a Mortgage

In closing, the decision to apply now or wait depends on your specific situation and financing objectives. In many cases it is possible to qualify for a mortgage despite having a low credit score. In other cases, it may make more sense to wait until your score is higher so you are eligible for better mortgage terms and can afford a higher loan amount.

Sources

"II.A.1.b.ii.(A).(3) Borrower Minimum Decision Credit Score."  FHA Single Family Housing Policy Handbook 4000.1.  Federal Housing Administration, January 2 2020.  Web.