Mortgage Rates With Bad Credit And Low Credit Scores


This BLOG On Mortgage Rates With Bad Credit And Low Credit Scores Was PUBLISHED On March 12th, 2019

Mortgage Rates With Bad Credit does not impact mortgage rates.

  • Lenders often make mortgage interest rate adjustments called Loan Level Pricing Adjustments
  • Loan Level Pricing Adjustments is often referred to LLPA
  • The biggest factor that affects mortgage rates
  • Let’s take a case scenario with two borrowers with 700 plus credit scores
  • Borrower A has a 700 credit score with no derogatory credit tradelines in their credit report
  • Borrower B has a 700 credit score but had a prior foreclosure, bankruptcy, outstanding collections, charge off accounts
  • Borrower B was able to boost his credit scores to 700 FICO in a rather short period of time due to re-establishing his credit
  • Borrower B re-established his credit by getting three secured credit cards, an installment loan, and was added on as an authorized user on two other revolving account tradelines
  • Mortgage Rates With Bad Credit will not have any LLPA’s
  • Many borrowers think because they had a prior bankruptcy and/or housing event that they will get higher mortgage rates
  • Again, this is not the case

Mortgage rates with bad credit, as long as it was prior bad credit, has no impact on rates.  

What Affects Mortgage Rates With Bad Credit And Low Credit Scores

Prior bad credit does not affect mortgage rates.

  • There are no pricing adjustments due to a prior bankruptcy, foreclosure, number of collections, charge offs, or prior late payment
  • As long as the borrower has re-established credit after a period of bad credit, it will not affect mortgage rates
  • Credit scores are one of the factors that affect mortgage rates
  • Borrowers should try to boost their credit scores as high as possible prior to applying for a mortgage

Here are general factors that affect mortgage rates:

  • Credit Scores
  • Loan-To-Value
  • Type Of Property
  • Debt To Income Ratio
  • Automated Versus Manual Underwriting
  • Loan Size

Analyzing Mortgage Rates With Bad Credit And Low Credit Scores

The higher the credit scores, the lower the mortgage rates. Lenders consider higher credit score borrowers less riskier than lower credit score borrowers. There can be a 1.0% difference in mortgage rates between a 700 credit score borrowers and 620 credit score borrower.

There are two types of traditional loan programs:

  • Government Loans
  • Conventional Loans

Government Loans are owner-occupant mortgage loans guaranteed by one of the following government agencies:

  • HUD insures and guarantees FHA Loans
  • The Department of Veterans Affairs guarantees VA Home Loans
  • USDA Rural Development insures USDA Loans

VA and USDA Loans do not require any down payment and offers 100% financing.

  • FHA loans require 580 credit scores for 3.5% down payment FHA Loans
  • Under 580 credit scores, 10% down payment is required
  • Government Loans are insured by the federal government in the event borrowers default on their government mortgages
  • Due to government guarantee, there are no pricing adjustments on loan-to-value
  • Whether borrowers put down 0% down or 20% down payment on VA and/or USDA Loans, the mortgage rates are the same
  • Conventional Loans are not insured and/or guaranteed by any government agency
  • Therefore, the down payment does impact mortgage rates

Borrowers with 3% down payment will get higher rates than borrowers who put 20% down payment. Larger down payments mean skin in the game by buyers and less risk to lenders.

How High Can Mortgage Rates Be With Very Low Credit Scores

Gustan Cho Associates Mortgage Group has closed many borrowers with credit scores in the 500’s credit score range. There are maximum caps on mortgage rates lenders can charge borrowers no matter how low their credit scores are. Days of lenders charging 10% mortgage interest rates has long been gone. Maximum rates on government and conventional loans cannot be higher than 5.75% at today’s market. How about borrowers with 500 credit scores? 500 credit score borrowers will probably get charged a 5.75% rate PLUS Discount Points. Borrowers can buy down mortgage rates with discount points. Today, a 700 credit score borrower would get a 4.25% mortgage rate on a FHA Loan. A 500 credit score borrower will get a 5.75% rate with 1.5% discount points. Borrowers with lower credit scores will definitely pay a higher rate and most likely discount points. With the rapidly rising housing market, most home buyers want to purchase a home with low credit scores and higher rates than wait. After they purchase their homes, they can work in re-establishing and increasing their credit scores and refinance at a later date. 

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