3 Best Ways to Get a Mortgage Approved with a 500 Credit Score

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For people with very low credit scores, you could feel as if there is no hope to get a mortgage. But there is still hope, even if you want to get approved for a mortgage loan with a 500 credit score on a purchase or refinance transaction.

According to Ellie Mae, a mortgage software firm, the average FICO score for an FHA application is 689 as of 2018, while it was 755 for a conventional loan. While those are much higher than someone with a 500-credit score, you may have more options than you think. Some mortgages today are specifically tailored to get low credit score people into homes. The government understands that home ownership is a good thing for people and society, as long as the home owner can afford the loan.

mortgage credit score requirements

This article provides insights on how to get a mortgage application approved with a credit score as low as 500.

Minimum Credit Scores for Home Loans

  • FHA – 500 is minimum fico score on FHA financing
  • VA – No Minimum fico core for VA mortgages
  • USDA – 620 to 640 minimum credit scores depending on lender
  • Fannie Mae – 620 to 660 minimum credit scores depending on mortgage company
  • Freddie Mac – 620 to 660 minimum credit scores depending on lending source
  • Non-QM – No Minimum fico core for hard money, AKA non-qualified mortgage programs

 

FHA Credit Rules

There is a reason that so many people with lower credit scores turn to FHA mortgages. FHA loans are designed for people with past credit problems. They also do not have risk-based pricing, which means that you do not need to pay a majorly higher rate or mortgage insurance price based upon credit score. It is possible that you could see a minor increase in rate with a very low credit score in the low 500s, but it will not be nearly as bad as with a conventional mortgage.

For people with low credit scores, the FHA mortgage is the most popular option. These loans are guaranteed by the Federal Housing Administration. This provides lenders with the assurance that if a person with a low credit score does not pay their home loan, FHA will pay back most of what is owed. This allows lenders to take a risk on those with low scores, even in the 500 range.

The minimum score required for an FHA home loan is 500. But you should know that many lenders will not allow you to get a loan with that score. It is possible according to FHA credit rules, but many lenders will have a higher credit score requirement. The best advice with a 500-credit score is to check with several FHA approved lenders. You may be able to find one who can help you.

If you can find someone to approve you with that credit score, you will need to make a 10% down payment. The minimum credit score requirement for a 3.5% down payment is 580. In some cases, lenders may want to see a 620 or 640 credit score to get a home loan

For those with a credit score below 580, you will need to do some convincing of the lender with documentation to be approved for a home loan. FHA loans are designed to help people with low credit scores get a home loan. The US government understands that people go through bad financial times and may have experienced a foreclosure or bankruptcy. Having these negative marks on your credit report will not always prevent you from getting a home loan.

However, if you are continuing to make late payments on utility bills and credit cards, you will probably be turned down even for FHA financing. Current financial instability will prevent you from being approved for almost any home loan. You need to show the lender that you are financially stable. This means you should have had no late payments on anything on your credit report for at least a year. If you can do that, you may be able to get approved with a credit score in the 500s.

VA Credit Rules

VA home loans are very popular with military and veterans. There is no down payment requirement and you do not need mortgage insurance. There is no minimum credit score requirement for a VA loan, but most lenders do want to see a credit score of at least 580 before approving the loan. But as with FHA loans, there are few if any risk-based pricing adjustments. So, with a low credit score, you can get a very low interest rate that could even be under market rates.

Non QM Rules

Non-qualified loans used to be called subprime mortgages and they are typically offered by private-money lenders. In many cases, there is no credit score requirements.  However, borrowers must have a significant amount of equity to qualify for a no credit score minimum loan. Therefore, if you are seeking a 500-credit score loan and verifiable equity you may be eligible for this type of bad credit mortgage.

Other Mortgage Options for Credit Scores Above 600

USDA Credit Rules

Loans backed by USDA are for buying rural properties for people with low income and credit scores. But USDA loans often require a 640-credit score, while some lenders will consider a credit score as low as 580. You will need to check with several USDA approved lenders if your credit score is in the 580 range.

Conventional Credit Rules

Conventional loans that are not backed by a government agencies like Fannie Mae or Freddie Mac will not take people with a credit score below 620 for the most part. And loans at that FICO score level will come with a significantly higher rate. So, if you have a credit score in the low 600s and 500s, you would be best off considering one of the government-backed loans above.

Bottom Line on 500-Credit Score Mortgage Programs

The takeaway on home loans for people with 500-credit scores is that there are mortgage programs still available in 2018. Yes, you must meet the under-writing requirements from these high-risk lenders who will typically require more equity for a refinance and more of a down-payment on a home purchase. Yes, interest rates will likely be higher and there will be closing costs and lender fees in most cases, but if you have a 500-credit score, this may be a great opportunity to reestablish your credit while mortgage rates are so attractive.

 

About Bryan Dornan

Bryan Dornan is Chief Editor of RefiGuide.org. Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. Bryan's continual focus is to promote affordable home-ownership to consumers like you across the United States. Should you have any questions about articles like this, let him know.