Purchasing a home is indeed one of the biggest achievements in life. However, it could be tough to secure approval for a mortgage in the event that you have a bad credit rating. Lenders consider a credit score of 500 to be very poor. Now, the question is, can one get a mortgage with a credit score of 500? Let’s explore your options.
What Lenders Look For
During the assessment of mortgage application, the credit report and your score are thoroughly scrutinize by the lenders. Lenders also wish to establish that you have paid your debts on time and that you have a proper credit utilization. A credit score of 500 or below can be considered a warning that you may default on a mortgage. Lenders also consider your current debts, income, assets, employment and the down payment you are willing to make.
Minimum Guidelines
However, as it has been seen, getting approved is not entirely out of the question even with a very low score. Traditional credit score providers demand a minimum of 620 FICO score. That being said, some mortgage programs that are supported by the government may afford more room for maneuver in case if your score is below 600. Here are some of the minimum guidelines to qualify:Here are some of the minimum guidelines to qualify:
- FHA loans: 500 credit score
- VA loans – There is no minimum credit score requirement but borrowers are often above 580.
- USDA loans – No official minimum, but usually at least 580 and above.
The catch is that while these programs may approve a 500 credit score, they will generally need plenty of compensating factors before signing off.
Strategies That Can Increase Your Likelihood
It is advisable to take measures to ensure your score rises from the 500s before applying to be above 580. In the same respect, there are other compensating factors that can be used to balance the low score to the acceptable level in the eyes of the lenders. Here are some tips:
Pay down balances – Reduce the credit card balances
Pay off collections/judgments – Settle any amount that may have been owed by the customers and not fully paid.
Avoid taking out new credit accounts – This will lead to more inquiries and will not be good for your score.
Add a credit builder loan - May help illustrate better payment behaviors
Build your cash buffer – Ideally, two months’ worth of mortgage payments
Come up with a large down payment – this should be at least 20% or more to minimize risk.
Get a co-signer – Ideally, this should be someone with a good credit rating
Describe previous problems - Describe the events and the transformations since
Choose the Right Programs
Applying with programs that are backed by the government such as FHA, VA and USDA loans offer the highest chances of approval despite bad credit. It is important to note that conventional loans from banking institutions often have higher standards. One can simply consult an experienced mortgage broker to find the right lenders willing to consider compensating factors. Do not limit yourself to just the credit scores but make sure to highlight your whole financial history.
The Bottom Line
Getting a mortgage with a 500 credit score is very challenging but not entirely unattainable, particularly if you enhance your score or balance it out with other qualifications. It is therefore a balancing of the right ratio of debt-to-income, assets and employment history in addition to a down payment that will help counter the effect of low credit. It is not impossible though to own a home if you are disciplined and patient in your savings.
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