Buying a home is what most people in America want eventually. If you have bad credit, however, you may feel that a house is beyond your reach. When your credit score is well under 600, even 500, can you still get a house? In some cases, yes, although doing so may require you to do more shopping for a mortgage than you would otherwise. After reading this article, get in touch with one of our loan professionals and we will work to qualify you for a home loan, regardless of your credit score.
Buying a House with a 500 Credit Score Is Possible
There are several mortgage programs to consider if you have a sub-600 credit score, even as low as 500. However, keep in mind that the vast majority of home buyers have good credit, with the typical score being around 700. Only about 5% of home loans go to people with a credit score under 620. Also, the best mortgage rates are often reserved for people with the best FICO score.
What Credit Score Is Needed to Buy a Home and Qualify for a Mortgage?
The credit score necessary to purchase a house can vary depending on the loan type and the specific requirements of the lender.
While there isn’t a universal credit score requirement for home buying, certain minimum scores are generally accepted for different loan types.
For instance, an FHA loan may be attainable with a credit score as low as 500, provided you can make a 10% down payment.
On the other hand, conventional loans, typically backed by entities like Fannie Mae and Freddie Mac, often will require a minimum credit score of 620.
Ask about the latest options for first-time home buyer loans with bad credit.
What Is Considered Bad Credit for a Home Buyer Loan?
Your credit score isn’t the only thing that mortgage lenders look at, but it is an important data point to determine the risk you pose to their investors. Here are how various credit scores are viewed by mortgage companies:
- 800 or higher: Excellent
- 740 to 799: Very good
- 670 to 739: Good
- 580 to 669: Fair
- Below 580: Poor
As you can see, anyone with a 500-credit rating has a very poor credit score, but getting a home loan improved isn’t impossible! Here are a few options with this credit score:
FHA Loans
An FHA loan is probably your best bet with a 500-credit score. FHA loans with bad credit are still backed by the US government, so FHA-approved lenders may accept borrowers with lower credit score. FHA loans can typically be approved by the lender with a 580-credit score and 3.5% down. Or, you could get approved with a 500 score and 10% down. The Federal Housing Administration has been backing home loans since 1934.
That said, it is likely that the lender will scrutinize the application of someone with a 500-credit score. Many FHA-approved lenders may not approve someone with that score, so you may need to try various lenders. Also, it is important for you to show a solid payment history going back at least a year. The lender will want to see that you are back on track financially and making regular debt payments.
A benefit of FHA loans is they have competitive rates because the government backs them. Also, borrowers must pay mortgage insurance, which is an extra expense, but it helps to keep the rates competitive. Learn how to get an FHA mortgage with low credit scores.
VA Loans
A VA loan is a possibility if you are in the military or retired. You do not need to have a specific score to get a VA loan, but many lenders may want to see a 620. If you have a 500 score, check with several VA-approved lenders. VA loans are one of the few you can get with 100% financing available.
Non-Qualified Mortgage (Non QM Loans)
The so-called QM rule started in 2014. The US government set up the Qualified Mortgage rule so the public can access safer mortgages and reduce the number of high-risk loans. The QM rule is why most mortgage lenders require a minimum 620 or so credit score to get a loan approved.
However, there are still a few non-QM loans out there with more flexible credit criteria. Banks do not sell these loans to investors, so they can set their own qualification rules.
There may be non-QM loans for poor credit available with a 500 score. But you will find more leads if you have a 580-credit score. But these loans have higher rates and you may need to put more money down.
It’s crucial to note that although lenders establish minimum credit score thresholds, having a higher score can enhance your prospects of securing a favorable mortgage offer.
If your credit score is 500, it’s likely that you’ve faced some financial challenges. While it might seem promising to be able to purchase a house despite poor credit, it’s essential to delve deeper into what your credit score signifies about your financial health. Could you be taking on more than you can handle? Answering yes to this question might mean you’re digging yourself into a deeper financial hole.
Furthermore, with Non-QM loans, even if you’ve experienced a foreclosure, which can linger on your credit report for years, you might still qualify for a mortgage if you can demonstrate consistent funds in your bank account for at least a year. This route could offer a faster path to homeownership without the risks associated with subprime mortgages and hard money loans.
Consider exploring government-backed loans instead of pursuing this route. Remember, non-QM mortgages often come with higher-than-average interest rates.
FHA vs Non-QM Loans
Many people do not realize that FHA loans are generally a safer and more cost-effective option compared to subprime loans from potentially risky mortgage lenders. Non-QM loans, as they are known today, typically come with higher interest rates than FHA mortgages. These loans are often sought by borrowers who lack income or employment documentation and have poor credit. Additionally, unlike the FHA loan program, Non-QM loans do not have government backing, which means mortgage lenders often charge higher interest rates to compensate for the increased risk and to ensure a return on their investment.
Raise Your Credit Score, If Possible
Getting a loan with a 500 FICO score is possible. But you will have a less stressful home buying experience if you wait to raise your score. First, try to pain down any debts that you can so you will have a higher debt-to-income ratio. This will make you more desirable in the lender’s eyes. Also, you should have your income and debt payments stabilized so you are no longer marked late on your credit reports. When you raise your credit score to close to 600, this will make it easier to be approved for a home loan.
Takeaway on Finding a Mortgage Loan with a 500 Credit Score
Getting a mortgage with a 500 score is possible, but it will be more difficult than if you had a score in the high 500s or low 600s. Ideally, wait to apply for a bad credit mortgage until you have at least a year of on time payments for your various debts.
Once you have done that, your credit score could rise considerably from 500. Doing so may make it easier to get approved with a subpar credit score. Our loan professionals will work tirelessly to get you approved for your dream home, so give us a call today.
