Can you get home loans with a credit score of 500? Yes! That is very much possible. They are several home lenders with a credit score of 500 owing to the flexible rules of lending these days.
Notwithstanding the fact that a credit score of 500 is not a fair credit to buy your house, there are some possibilities for that now. Although a credit score is a major factor checked by lenders, a bad credit score can actually hurt you.
If you’ve ever been in financial trouble, you understand how aggravating it can be when that information appears on your credit report. Lenders use the information on your credit report to determine your risk as a borrower, and late or missed payments may make you appear riskier.
Furthermore, your credit score may suffer, affecting the availability of home loans. A credit score of 500 is not desirable because it is low by FHA standards.
How to Qualify for A Mortgage with A Bad Credit Score of 500
Do you know how to get a mortgage with a 500 credit score? Yeah! There are certain requirements that you have to meet to be able to qualify for the mortgage with a bad credit score of 500. Let us consider some of the requirements you need to be qualified for a bad credit loan;
A minimum of 10-15% down payment depending on your bad credit lender and how low your credit score is. If you have a credit score less than 500 (450), you need to pay more for a down payment
If you are a W2 wage earner or self-employed, you need to show a minimum of a 2 years work history.
Previous financial records and credit history are also checked.
You must be of the minimum legal age
PMI is basically not a requirement for this kind of loan
If you have a high Debt to Income Ratio, it also helps to increase your chances of getting approved for the loan.
If you meet the flexible criteria above, it does not completely guarantee that you will get mortgage approval with bad credit of 500, but it only increases your chances of getting approved.
Top Home Lenders for Bad Credit Score of 450-600
It is possible to get your home Loans with a credit score of 500 or less than 500 from bad credit mortgage lenders. We will give you a list of some of the lenders that will easily approve your mortgage for your home despite your bad credit score.
You’ll agree with me that most lenders offer FHA loans with credit scores as low as 580. So, if your credit score is 580 or higher, you only need to put down 3.5 percent.
The difficult part is for those with poor credit (500-579). Yes, they may still qualify for an FHA loan, but you’d need to put down at least 10%, and it’ll be difficult to find lenders who accept a credit score of 500.
Another advantageous feature of an FHA loan is that, unlike conventional loans, FHA-backed mortgages are not subject to risk-based pricing. This is a term known as “loan-level pricing adjustments” (LLPAs).
A risk-based pricing fee is applied to loan applications that have lower credit scores or other less-than-ideal characteristics.
There may be some interest rate “hits” for FHA borrowers with poor credit, but they are typically much lower than rate increases on conventional loans.
This means that for FHA-backed loans, low credit scores do not always necessitate higher interest rates.
However, keep in mind that the FHA requires an upfront and annual mortgage insurance premium (MIP), which will increase the overall cost of your loan. In 2014, the qualified mortgage rule, also known as the QM Rule, went into effect.
The QM rule was established by the federal government to create safer loans by prohibiting or limiting certain high-risk mortgage products.
This is why most loans require a credit score in the 600s, as well as a down payment and/or private mortgage insurance.
However, some “non-QM” loans with more flexible rules are still available.
When banks do not sell their mortgages to investors, they are free to set their own criteria, such as requiring a lower minimum credit score.
As a result, some non-QM loans are available with credit scores as low as 500. However, as with an FHA loan, a FICO score of 580 or higher increases your chances of finding a lender who will approve you.
The disadvantage is that non-QM loans typically have much higher interest rates than conforming mortgages. So, if your credit score is a little too low for a conventional home loan, it may be worth deferring your purchase until you can improve your credit and lower your borrowing costs.
Surprisingly, the rocket mortgage company offers home loans with a credit score of 500. No. Rocket mortgage minimum score is 580. You can find their rates here for their home equity loans.
Fannie Mae HomeReady: Minimum credit score 620
HomeReady requires only 3% down and a 620 credit score. Plus, you can use additional income from a roommate or border to help you qualify for the loan. More so, you don’t have to be a first-time buyer to qualify for the loan.
USDA home loan: Minimum credit score 640
The US Department of Agriculture backed up the USDA home loan. If you have a credit score of 640 FICO you most definitely qualify for this loan. There is an absence of a down payment and it has low rates. However, the loan is majorly for those residing in rural areas.
VA loan: Minimum credit score 580-620
VA loans are mortgages from the Department of Veteran Affairs. They are mostly given to veterans, service members, and some individuals from the military. There is no requirement for any down payment and it has one of the lowest interest rates. Although, there is no minimum credit score fixed for VA loans most lenders still insist you have a bad credit score of 580-620 depending on your lender.
If you want a non-QM loan, look into the specialty mortgage programs that some banks and credit unions provide that are neither conventional nor government-backed. Work with a mortgage broker who can recommend products from various lenders that may be a good fit for you.
But what about the good news? The beautiful news is that you can improve your credit score and have some control over it. Just as missing payments and not paying your debts can lower your credit score, there are steps you can take to improve it. It will require some effort, but it is not impossible.
How to Improve a Bad Credit Score of 500 For Home Loans
Despite the fact that you can secure home loans with a credit score of 500, it is important you understand how to increase your credit score to have a high score of 600 and above. Follow the good practices below to change your bad credit score.
1. Recognize your score.
Understanding what goes into your credit score is the first step toward improving it. A credit score is determined by several factors in your credit history, such as your payment history, the amount you owe, the amount of credit available to you, the length of your credit history, and the types of credit you have.
However, two factors have the greatest impact on your credit score: on-time bill payment and available balance.
Begin by gaining control of your payments and total debt. If you’re having trouble paying your credit card bills, call the company and explain your situation. Try to work out a payment plan that works for you. Once you have that, try to keep your balance at less than 30% of your available credit limit.
3. Examine your credit report.
Make it a habit to check your credit score and credit report on a regular basis.
4. Obtain Secured Credit Cards
If you’re starting from scratch, you’ll most likely need to start with a secured credit card. A secured card is backed by an upfront cash deposit, which is usually equal to your credit limit.
You’ll use the card like any other credit card: buy things, make payments on or before the due date, and pay interest if your balance isn’t paid in full. If you fail to make payments, your cash deposit is used as collateral.
When you close the account, you will receive your deposit back.
Secured credit cards are not intended to be used indefinitely. The goal of a secured card is to build your credit enough to qualify for an unsecured card, which does not require a deposit and offers better benefits. Select a secured card with a low annual fee that reports to all three credit bureaus, Equifax, Experian, and Transunion.