As a buyer, your primary focus should be securing a mortgage with favorably low interest rates and a monthly payment that doesn't constrain your budget. But remember, your credit score is one of the most important factors lenders consider when deciding whether to approve you for a loan. It informs lenders how likely you are to pay your bills on time and repay the loan in full.
A down payment, on the other hand, demonstrates that you’re serious about homeownership— enough to invest your savings in the property. Plus, the more money you put down, the smaller the mortgage loan balance. Consequently, the lender is taking on less risk by giving you a mortgage.
Can a large down payment offset bad credit? It can but not always.
Do Mortgage Lenders Still Consider Your Credit Score If You Are Putting a Large Down Payment?
Yes, they do. A credit score is a measure of financial reliability and creditworthiness.
A higher credit score represents less risk for the lender. It means you’ve handled credit well in the past, and this increases a lender's confidence that you'll be able to meet your mortgage obligations on time. As such, a high credit score can help you qualify for a lower mortgage interest rate. Some lenders may also reduce their down payment requirements if you have a high credit score.
In contrast, a low credit score signifies that you've had some payment issues in the past and paints you as financially unreliable. For this reason, lenders are more hesitant to work with borrowers with low credit scores. They're taking on quite a bit of risk by lending you money.
To offset this risk, you can demonstrate your commitment to the house by putting down more of your savings as a down payment. This way, you reduce the overall loan balance and the risk you pose to the lender.
What Is the Minimum Credit Score Requirement Lenders Have for Conventional Loans?
A bad credit score for a mortgage is one that's too low to get you a loan. In most circumstances, you'll have to settle for higher interest rates or put down a more considerable sum of money to qualify for a loan with a low credit score.
There’s a lot of focus on credit scores when it comes to conventional loans. Conventional loans are riskier to lenders because they’re not guaranteed by the government, unlike loans backed by the Federal Housing Administration or the Department of Veterans Affairs. That's why they tend to have stricter requirements.
Conventional loans backed by Fannie Mae and Freddie Mac require a minimum credit score of 620, but some lenders may require a higher credit score depending on how much risk you're willing to take on. Borrowers with a score of 740 or higher can qualify for lower down payments and are likely to get more favorable interest rates.
Do Lenders Approve You for a Lower Rate When You Put a Higher Down Payment?
Yes, they do. Lenders like it when you, as the buyer, have more stake in the property. A larger down payment means a lower loan-to-value ratio, which is a measure lenders use to evaluate risk. Think of your down payment as the equity you’ll own in a house the moment you buy it.
Since you’re starting with more equity, you have more stake in the house relative to the remaining loan balance. As a result, lenders see a lower level of risk because you’re less likely to default on your mortgage with so much of your savings already invested in the property.
So, if you can comfortably afford to put 20% or more down, do it! You may qualify for a lower interest rate, which means you’ll save money over the loan’s life.
Why Does Your Credit Score Matter if You Are Buying With All Cash?
Having the financial wherewithal to buy a house outright in cash gives you a real advantage. Paying cash means you won’t have to pay interest on a mortgage or incur closing costs.
From a seller’s point of view, it doesn’t make much difference if a buyer directly wires them the money or if they get a lender who does. Therefore, a seller is unlikely to ask for your credit score when you provide an all-cash offer.
Most buyers are unable to provide cash offers. In competitive markets, some realtor companies partner with lending institutions to facilitate cash offers because sellers are more likely to accept cash offers. If this is your case, you’ll still have to demonstrate your creditworthiness.
The Bottom Line
Mortgage lenders won’t dismiss your application outright just because you have a low credit score. They’ll look at your credit history and other factors like your income, down payment, and debt-to-income ratio. If they do decide to give you a loan despite your credit score, they will most likely need some type of compensation. A larger down payment may be the answer.
In other words, a steady income coupled with a sizeable down payment and maybe a smaller amount of debt may help you qualify for a mortgage despite a low credit score. But if your score is too low—let's say below 500—you'll find it challenging to find a lender willing to work with you, no matter how large your down payment. Few lenders are willing to take on such a risk.
FAQ #1: Do borrowers with higher scores save more?
Having a high credit score can save you money. A high credit score means you’re less likely to default on the mortgage. Since you represent less risk for lenders, you can expect to score a lower interest rate, which will lower your monthly payments and save you money over the loan’s life. Plus, lenders require less of a down payment when you have a high credit score. This way, you get to keep more of your savings.
FAQ #2: Do lenders approve you for a lower rate if you have a high credit score?
If you have a high credit score, you’ll almost always qualify for the best mortgage rates available. A high credit score gives you leverage to negotiate a lower interest rate. This, coupled with a large down payment, could significantly lower your mortgage rates. Reduced risk on the lender’s part means lower interest rates for you.
FAQ #3: Are buyers with higher down payments and bad credit considered a lower risk?
The answer depends on how bad their credit is overall. Few lenders, if at all, are willing to lend money to a person whose credit score is below 500—no matter how much their down payment. But a larger down payment does mean a lower loan-to-value ratio, which is another measure of risk.