A special purpose credit program could help you buy a house

September 19, 2022 - 5 min read

Overcome roadblocks to buying a home

Many would-be home buyers can feel sidelined due to low credit, lack of credit history, or other financial disadvantages.

Of course, there are home buying credit hacks, step-by-step guides to improve your score, and loan options specifically designed for anyone with low FICO ratings.

But perhaps even more helpful are the special purpose credit programs (SPCPs) some lenders offer. These can help credit-disadvantaged buyers — especially those in historically marginalized groups — buy a house without waiting years to improve their credit score or financial picture. Here’s what you should know.

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Special credit mortgage programs, explained

A Special Purpose Credit Program (SPCP) is a tool used by lenders to extend mortgage credit to historically underserved and overlooked borrowers. Those conditions typically and disproportionately account for women, borrowers of color, and people with disabilities.

While the Equal Credit Opportunity Act prohibits lenders from discrimination, it doesn’t cover borrowers with low credit scores or the fairness of credit scores as a barometer in the first place.

“Generally, Hispanic and Black [borrowers] are more likely to have credit scores below 660. Taking that into consideration when looking at standard underwriting guidelines, they might not be as inclusive as intended,” said Michael Innis-Thompson, head of community lending and development at TD Bank.

Special credit programs allow lenders to reach underserved communities by making exceptions with regard to credit score levels or debt-to-income ratios.

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How to get a mortgage using a special credit program

When it comes to getting a mortgage and home buying, what you don’t know could hurt you (or keep you renting forever). If you’re unsure about low-credit mortgage programs, how they’re used, or if a lender even has one, the best way to get insight is by talking directly to a mortgage professional.

For first-time home buyers, it’s especially important to understand your credit score and what lenders look for, according to Innis-Thompson. That knowledge can “really reduce the amount of anxiety and frustration individuals might experience if they just go in blindly,” he said.

Private lenders offer special purpose credit programs to help disadvantaged buyers. State and local governments can also offer down payment and closing cost assistance.

TD Bank is one lender that established its own special credit program this year. Its program is targeted toward the Black and Hispanic communities, and offers a $5,000 credit that can be used for a down payment or closing costs.

“The TD special purpose credit program was born out of our commitment to address the racial wealth gap. Data shows that Blacks and Hispanics would be less likely to have as much of a down payment or closing costs as non-Hispanic whites because they don’t have inheritance or the same ability to save with income disparities, and so on,” Innis-Thompson said.

Innis-Thompson also explained how the program was thoroughly stress-tested to ensure sustainable homeownership for any borrowers who use it, despite higher debt-to-income ratios and expanded credit criteria.

Special purpose mortgage programs are becoming more common

As the pandemic turned the housing market white hot, property prices soared and widened the gap in homeownership attainability.

Fortunately, SPCPs could soon start to become more prevalent. In June, the National Fair Housing Alliance (NFHA) and the Mortgage Bankers Association (MBA) released an online toolkit for lenders to develop their own programs.

The toolkit is “a commitment to promoting justice, fairness, inclusion, and equity,” said NFHA President and CEO Lisa Rice. It’s also “a commitment to strengthening communities, increasing sustainable homeownership, and growing our economy.”

An increased number of SPCPs would give more economically and socially disadvantaged borrowers a better shot at owning a home.

Other types of assistance for home buyers

While some lenders have wide-scaled SPCPs, some localities specifically focus their efforts on helping low-income and low-credit borrowers. In fact, every state offers some form of down payment assistance or closing cost assistance, usually geared toward first-time home buyers who need financial aid.

For example, Salisbury, Md., has its own Neighborhood Housing Services program that offers home buyer counseling and forgivable grants, according to Hope Morgan, branch manager at the Mortgage Network.

Morgan sits on the program’s board and helps design products with the community’s needs in mind. If a borrower uses a lending product from Neighborhood Housing Services and buys a home within Salisbury’s city limits, they only need a cash requirement of $1,000, she said.

“Then from there, we go into Maryland’s state programs. They have ones where borrowers can get in with little cash, different products that will lend up to 5% for down payment or closing costs, and grants up to $50,000 to get rid of student debt,” Morgan said.

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How to improve your credit score

Of course, there are ways to raise your credit profile as well. Doing so before you buy can help you qualify for a home loan more easily and even earn you a lower interest rate. Some of the best ways to improve your credit score before buying a home include:

  • Making all loan payments and credit card payments on time and in full
  • Keeping your credit balances below 30% of your total limit
  • Not opening new credit accounts or closing old accounts
  • Checking your credit report for errors and correcting any you find

The Department of Housing and Urban Development (HUD) also has a list of agencies on its website that provide borrowers with resources to improve their credit scores and home buying budgets.

“I strongly encourage individuals to look for HUD-approved counseling. These agencies are funded by the government and supported by a lot of organizations philanthropically,” Innis-Thompson said. These resources also help borrowers learn about everything that it takes to buy and own property.

“Do your homework and make sure you sign up for something truly beneficial. Get your credit report, understand what’s on there and if you have anything outstanding,” Morgan said.

Other tips to buy a house with low credit

Overall, there’s a wide variety of home buying programs intended to help borrowers with bad credit or other financial roadblocks. If your score is low, these tips can help you get into a home sooner:

  • Take steps to improve your score before buying
  • Find a Special Purpose Credit Program (SPCP)
  • Use an FHA loan (min. credit score 580)
  • Use a VA loan (min. score 580-620)
  • Ask your lender about a rapid rescore

When in doubt, it typically helps to connect with a mortgage lender sooner rather than later. Even if your score is too low to qualify right now, loan officers can often identify the cause(s) of a poor score and help you tailor a plan to improve it. Having your lender help you with a credit plan can be much easier and more effective than going it alone.

The bottom line for borrowers

Not having excellent or even good credit shouldn’t stop you from becoming a homeowner. Special purpose credit programs exist specifically to help marginalized borrowers with lower credit scores or those who are credit invisible.

Knowing about and utilizing these programs is half the battle. Working with a mortgage professional can help. “Establish a relationship with a lender, so you know what products are available and what you can be prepared to do,” Morgan said.

If you’re ready to start your home buying journey, reach out to a local lender today.

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Paul Centopani
Authored By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.