It makes sense for people to inquire about their ability to obtain a mortgage when they learn they have a credit score of 500. However, it makes more sense to ask, “What kind of mortgage loan should I get for my house?” when you consider that even people with low credit scores can apply for home loans.
Even ten years after the late 2000s housing market crash, low credit applicants still have many options. These also extend beyond the subprime loans that are still in existence today.
Unfortunately, having poor credit means you won’t meet the requirements for traditional or conventional loans, which are frequently chosen for mortgages because they have lower costs. To qualify for this type of loan, you will need to put in a lot of effort to improve your credit score and make a larger down payment.
There are fallbacks, however, in the form of government-insured loans. Uncle Sam has backed these mortgages so that lenders will approve more loans, maintaining the health of the housing market. You must be purchasing a home solely for use as your primary residence in order to qualify for these loans. You can learn more about the various mortgages available to borrowers with credit scores as low as 500 and a few of the lenders who provide them below.
Home Loans: 500 Credit Score
The two primary mortgage options available to most Americans are conventional loans and FHA loans. Conventional loans are borrowed from private lenders. The government does not insure these. You can therefore usually borrow more money without paying more in fees. However, the majority of lenders typically demand a minimum credit score in the 600s.
Obtaining an FHA loan is your next option if you aren’t eligible for a conventional loan. These are mortgages guaranteed by the Federal Housing Administration. FHA loans are targeted more at first-time homebuyers, especially those with credit scores in the Poor to Fair FICO Score range, whereas conventional loans are more for seasoned borrowers with credit scores in the Good range.
An FHA loan can be applied for by anyone with a credit score of at least 500. But it makes more sense to apply for a conventional mortgage if you already have a credit score of 620 or higher. For conventional loans, you can put down as little as 3%, but the lowest amount for an FHA loan is 3. 5 percent. Additionally, you can only make this minimum deposit if your credit score is at least 580. You must pay at least 10% of your home’s purchase price because you only have a 500 credit score.
The price of mortgage insurance is another factor that would lead more people to choose a conventional loan over an FHA loan. For the two types of loans, these are referred to by slightly different names: mortgage insurance premiums for FHA loans and private mortgage insurance for conventional loans. However, they essentially have the same goal. This fee protects the lender in the event that the borrowers stop making loan payments. If you contribute at least 20% of the cost of your home, you are exempt from paying conventional insurance. However, for FHA loans, the mortgage insurance is retained for at least eleven years of payments. That is 132 months’ worth of insurance payments that are not in your best interests as a borrower.
There is some good news, though. FHA loans continue to be far preferable to subprime loans from shady lenders. Subprime loans, or Non-QM loans as they are now known, typically have interest rates that are higher than FHA mortgages. If you have bad credit, no proof of income or employment, and those conditions, you typically qualify for these. Additionally, because the loan is not guaranteed by the government, unlike an FHA loan, lenders frequently have to charge higher interest rates in order to recover their investment.
Borrowers with bad credit frequently require the assistance of down payment assistance programs. Once more, a benefit of the FHA loan is the availability of these applications. But once more, if you’re applying for a conventional or subprime loan, you can’t do this.
For someone in your situation, the minimum down payment required at this time is 10%, making it a little steep. As a result, the FHA has no problems with borrowers raising down payment funds through gifts of cash from family members or friends or through grants from local or state programs that provide down payment assistance.
According to the Census Bureau, 97% of the U.S. is rural. So as niche as the rural housing loan may sound, it can cater to millions of Americans.
The U. S. Another government organization that supports mortgage loans is the Department of Agriculture. They can only insure your home if you reside in a rural area, as you might expect. To apply for this type of loan, you do not need to own a farm or work in the ranching industry. They won’t let you use the property for any business opportunities that could bring in money. Farm loans from the USDA may be available to you, but they will be separate from your USDA housing loan.
There is a household income limit that varies depending on the county where your home is located because these loans are primarily intended for lower-to-middle income households. In addition, you are welcome to apply regardless of your credit rating. However, keep in mind that you will have to go through manual underwriting in your situation. You go through the standard lender approval procedure for USDA loans, but the lender still sends your application to the USDA for an additional round of underwriting. You must get ready to explain the circumstances surrounding your 500 credit score and the supporting documentation to them. If there are outstanding medical bills or accounts that are being collected, your application might benefit if they can find mitigating circumstances in your past. For instance, do you currently hold a stable job, are you accruing more debt than you are making, and what other assets do you possess?
No down payment is necessary for USDA mortgages, which can be very advantageous for applicants with less than ideal credit. However, we would always advise here to put at least some money down so you can build home equity more quickly and obtain a mortgage at a lower rate overall. The sooner you build up equity in your home, the sooner you can use home equity loans in the future.
The COVID-19 pandemic has had the effect of making USDA mortgages harder to qualify for, so lenders who do approve for USDA typically have stricter overlays.
In your case, delaying your loan application will be the wisest course of action. If your credit score is slightly higher, more mortgage lenders will consider your application. You have two options for improving your credit: either do it yourself or use a credit repair company. Consider working with a mortgage broker who will search for lenders on your behalf if you need to buy a home quickly and waiting is not an option.
The Department of Veterans Affairs insures a housing loan that is the best value among government-backed loans. With a VA loan, you get all the best qualities of USDA and FHA loans without any of their particular disadvantages.
There is neither a down payment requirement nor a location restriction for VA loans. Mortgage insurance is also not required of you, but there is a VA funding fee.
Unfortunately, in order to be eligible for this mortgage loan, you must have relevant military experience or be the surviving spouse of a deceased veteran who hasn’t remarried.
According to the Department, there is no minimum credit score needed to be approved for a VA loan. This is due to the fact that many veterans have been able to use the VA with bad credit since it first became available in the 1940s. However, today’s mortgage lenders will have different requirements, so it will be reasonable to anticipate exceptions to this rule.
Although there may not be a wide variety of mortgage types available, there are thousands of mortgage lenders in each of the 50 states.
The likelihood that you will be approved for an FHA loan with a 500 credit score is higher if you don’t want to purchase a home outside of major cities or if you are not a veteran.
If you would like to open yourself to more loan options and mortgage lenders, though, we suggest spending time to clean up your credit history to get a higher credit score. Everyone can get a free credit report from Annual Credit Report, and from here, you can check if any errors may be pulling down your credit score.
Your options for a down payment and loans may change if you raise your credit score by 80 points. You will have more flexibility with FHA if you pay as little as 3 5% down payment, but you can compare mortgage rates from many more lenders for VA and USDA loans.
However, the best mortgage loan options are available to borrowers with credit scores of 620 and higher. Additionally, they might not have to be concerned about the types of mortgages they can apply for with or which mortgage lenders to use.
By taking action to raise your credit score right now, you can avoid paying more each month, paying for credit repair, or paying mortgage brokers.
FAQ
Can I get an FHA loan with a 500 credit score?
Technically, you can qualify for an FHA loan with a median FICO® Score as low as 500, but doing so has some significant disadvantages. The first is that you will require at least a 10% down payment. Second, when qualifying with such a low score, it is referred to as a subprime loan.
Can someone with a 500 credit score get a mortgage?
You can obtain a mortgage with a government-backed loan, such as an FHA loan, even if your credit score is only 500. While it may be tempting to purchase a home as soon as possible, it is preferable to take the time to weigh your options and interest rates as you begin looking for loans.
What is the lowest credit score FHA will accept?
Minimum credit score for FHA loans A minimum credit score of 580 and a 3.5% down payment are required to be approved for an FHA loan. 5 percent. If you can increase your down payment to at least 10%, you can still be approved with a credit score as low as 500.
How big of a loan can I get with a 500 credit score?
If you’re looking for a personal loan, some lenders offer them to borrowers with a 500 credit score, but how much of a loan can you get with that? Through some of these businesses, you may borrow up to $10,000. You can test out these three businesses: MoneyMutual, CashUSA, and CreditLoan.