Getting a mortgage with so-so credit score

Getting a mortgage with a weak credit score can be tough these days — even people with a near-perfect credit score have been rejected for loans. But for some lucky borrowers, things aren’t as bad as the doom-and-gloom crowd says.

At a recent press conference, Federal Reserve Chairman Ben Bernanke said lending standards for mortgages have tightened so considerably that “the bottom third of people who might have qualified for a prime mortgage in terms of, say, FICO scores a few years ago — cannot qualify today.”

Indeed, roughly one-in-four mortgage applicants was denied in 2010, up from about 18% in 2003, according to data from the Federal Financial Institutions Examination Council. And those are just the ones that apply — many discouraged potential borrowers don’t even bother to apply anymore.

Yet, there is money to lend. Bob Ryan, the acting commissioner for the U.S. Department of Housing and Urban Development, or HUD, recently said that mortgage money “is flowing, it’s stable, it’s tightened from the boom years, but it’s there.”

And many of those potential home buyers sitting on the sidelines may just have a shot at it — as long as they take a few crucial steps.

For some people, they believe you can’t get a mortgage at all — but you can if you know how to prepare.

What you need for traditional mortgages

Most of the major mortgage underwriters have only returned to the more prudent standards of the days before the housing bubble.  The used to refer to it as the 3 C’s of lending.  Credit, Capacity and Collateral.

• The ability to make a 20% down payment, plus closing costs and have some reserves.
• A good credit score. Borrowers usually need a minimum credit score of 620 but preferably higher.
• Enough income to afford payments. The general rule of thumb: no more than 28% of your gross income should go toward housing costs.

In today’s market, however, even having all four of these factors in place doesn’t always guarantee that you will get a loan.  Lenders are looking at the whole picture and the risk.  The risk isn’t always just the risk of default.  Most lenders have to sell the loan in order to recapitalize.  So they also have the risk of not being able to sell the loan off which is why they can be very picky about documentation.

What to do it you don’t have a perfect credit score

If you don’t have a perfect credit score you might try applying for an FHA Loan.  Standards for these loans, insured by the FHA and issued by regular mortgage lenders, are flexible and aimed at making mortgage borrowing easier, especially for working-class Americans.

For years, the FHA had no minimum credit score requirement at all. Now though, it requires a minimum of 580 to qualify for a 3.5%-down loan and 500 for a 10%-down mortgage.

In practice, however, some banks will impose higher standards.  That’s that part above about selling the mortgage.

If you know that you need to raise your credit score above the 600 level in order to improve your chances of qualifying, you might try a credit repair service like Lexington Law.  Companies like Lexington Law can help you raise your score so you can qualify for the mortgage.