Are you pushing your dreams of purchasing a home aside because you have bad credit? Good news, it is possible to qualify for a mortgage with less than perfect credit. Here is what you need to know.

You should first understand why credit is important to purchase a home? Lending is primarily risk based and credit scoring helps to mitigate risk. Think of it this way, your credit score is a snapshot of your financial personality! Lenders rely heavily on scores because it is a strong indicator of how you may repay the mortgage loan. The higher your credit score, the more of a chance you have at getting a mortgage under the very best terms. If your credit score dips below the 720 range, and depending on your mortgage type, your rate is likely going to be higher.

Here is a chart of credit score ranges & how lenders see these numbers:

720 and higher = Very Good

680 to 719 = Good

640 to 679 = Fair

580 to 639 = Poor

579 or lower = Bad

If your credit score is less than perfect, government financing may be a better option for you as they tend to be more lenient to lower credit scores.

VA loans are for military service members, veterans, and their spouses. VA-approved lenders provide affordable mortgages with as little as zero percent down.

FHA loans were created to increase home ownership in America by having more lenient loan requirements, including: allowing borrowers to have just a 580 credit score or higher to qualify.

Rural Development loans were designed to encourage people to populate more rural areas and by doing so, borrowers are eligible for 100% financing. In some cases, borrowers can be eligible for RD financing with credit scores down to 620.

If you have average to below average scores, you may have additional overlays that you have to adhere to in order to receive financing approval.

1. You may be asked to explain and document the reason you fell behind on monthly bills, and process of your recovery. Even if you only raise your credit score to 660 from 650 or so, you might be able to shave a few tenths of a percentage point off your mortgage interest rate.
   1. Here are a few tips on improving your credit:
      1. Avoid making late bill payments
      2. Keep your credit utilization below 30 percent
      3. Avoid applying for new credit

2. Be prepared to make more than the minimum investment.
   1. A larger down payment can also help make you more attractive to lenders, since you’ll need to borrow less money for the purchase and have more equity in the home.
   2. Gift funds are an eligible source for the down payment. 100% of the down payment can be a gift from a friend or family member.
      1. Some people with poor credit ask family or friends to help with the down payment. Sometimes this route requires a letter from the person who put up the cash stating that it’s a gift.
   3. Down-Payment Assistance and Grants
      1. You may be able to qualify for down-payment assistance or Federal Grants.

If your credit isn’t perfect, don’t get discouraged. You have options available to help you realize your dreams of becoming a homeowner. The best thing to do is continue to improve your credit by making little changes in your spending and contact a lender asap to determine next best steps.