Here's What Happens When You Apply for a Mortgage With Poor Credit

Many people who want to buy a home can't just purchase one outright with cash. And so it's common for home buyers to take out a mortgage loan.

But the lower your credit score, the more you might struggle to get approved for a mortgage. And even if you do get approved, you might end up getting stuck with an unfavorable rate on one. So if your credit score could use work, it's best to try to boost it before putting in your mortgage application.

What's the minimum credit score for a mortgage?

It generally takes a minimum credit score of 620 to qualify for a conventional mortgage. But there are other loan types where you can commonly get approved with a lower score.

With an FHA loan, for example, you can qualify for a mortgage with a credit score as low as 580 if you're making a 3.5% down payment -- an option that's available with this specific loan type. (With a conventional mortgage, you'll usually need to put down a higher percentage of your home's purchase price at closing.) But you can take out an FHA loan with a credit score that's lower than 580 if you're able to make a 10% down payment or more.

The problem with applying for a mortgage with poor credit

When you apply for a mortgage with really poor credit, you risk getting denied outright. But let's say your score is high enough to qualify for a mortgage, but far from great. In that case, you might end up getting approved to borrow for a home. But you might also get stuck with a higher mortgage rate on your loan.

The reason? When mortgage lenders loan out money, they take on the risk of not getting repaid. A lower credit score sends the message that you're a riskier borrower than an applicant with a higher credit score. As such, your lender might stick you with a higher interest rate to make up for the added risk it feels it's taking on.

How to boost your credit score before applying for a mortgage

If you want to not only increase your chances of getting approved for a mortgage, but snag a more affordable interest rate on one, then it's important to do what you can to boost your credit score before applying. One way to do that is to pay all incoming bills on time.

Your payment history carries more weight than any other factor when calculating your credit score. Being timely with bills and avoiding late payments or delinquencies is key when you want your credit score to rise.

You can also raise your credit score by paying off a chunk of existing credit card debt. That could help shrink your credit utilization ratio, which is another big factor in calculating your credit score.

It could also help to check your credit report for errors. There may be a mistake on your credit history that's dragging your score down, like a debt that's listed as delinquent that you actually paid on time and in full. Getting an error like that corrected could result in a quick credit score boost.

All told, it's possible to qualify for a mortgage with poor credit. Qualifying for an affordable mortgage with poor credit is another story. So if your credit score could use some work, do what you can to raise it before you put in an application to borrow money to buy a home.