Should I apply for a mortgage loan with a 560 credit score?

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I want to apply for a mortgage loan, most likely an FHA loan. I have a credit score of 560 and I have two default negative accounts on my credit report totaling around 3,000 and one good account for my student loans. I have about 3,000 saved so far for a down payment. Should I pay off the debt or apply with my credit score as is and set up a payment plan for the debt. I really need to purchase as soon as possible but I’m not sure if I will be approved with a 560 credit score. Will paying off just one of the accounts increase my credit score enough to be approved? Will applying for a secured credit card improve my credit score or hurt my chances at being approved for a mortgage because it is new credit account? Thanks to anyone that can help!

  1. Reply
    April 30, 2011 at 1:12 am

    There is no way you will be approved with that score. FHA loans require a minimum of 620 FICO. Conventional requires 720 FICO with 20% down.

    A clean credit report is also required. You will have to resolve those defaulted accounts before a mortgage lender will approve a loan. You may as well work on negotiating a settlement for as little as you can. Depending on the age of the default, you may be able to settle for 25% to 50% in a lump sum. Forget about payment plans. Better to save up till you can make a lump sum offer. Get any settlement agreement in writing and do not give the collector direct access to your bank account.

    You may as well get a secured credit card to help improve your score. Use the card, wait for the statement, and pay the balance in full every month. You will probably need at least 24 months of consistent, on time payment history to see improvement.

  2. Reply
    April 30, 2011 at 1:25 am

    Sorry. Homeownership is not for everyone.
    At this time with your credit score, your previous credit behavior, and you low savings, it is not in your best interest to purchase a property.

  3. Reply
    Steve D
    April 30, 2011 at 2:17 am

    FHA does not look at score – what you need is two years of perfectly clean credit. In your case, those two years start when you pay off the two accounts.

    You are also going to need more than $ 3,000. FHA as of today requires 3.5% down ($ 3,500 on a $ 100,000 mortgage) and then closing costs, which will be another 5 to 6% and then two months worth of payments in the bank over and above the down payment and closing costs.

    Note that recent reports out of the FHA indicate that they may sometime soon increase the minimum down payment (I am betting on 3 1/2 percent increases over the next 18 to 24 months bringing the minimum down payment to 5%).

  4. Reply
    Joe Sheehan
    April 30, 2011 at 2:41 am

    The right answer to this question is always YES, you should apply. If your score is below 580 you can get an FHA loan with 10% down if you qualify. Even if you don’t have 10% down, you should apply. You need to apply with a loan officer that will take the time to review your entire situation and coach you on the exact steps to increasing your score or qualifying in the future.

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