7 low credit score home loans (starting at 500 FICO)
What’s the minimum credit score for a home loan?
Buyers are often surprised at the range of low credit score home loans available today.
Most lenders will issue government-backed FHA loans and VA loans starting at a 580 credit score. Some even start as low as 500-579 (though these lenders are harder to find).
With a credit score above 600, your options open up even more. Low-rate conventional mortgages only require a 620 score to qualify. And with a credit score of 680 or higher, you could apply for just about any home loan.
So the question isn’t always “can I qualify for a mortgage?,” but rather “which one is best for me?”Find the right low credit home loan for you (Dec 3rd, 2020)
In this article (Skip to…)
- Compare low credit score home loans
- FHA mortgags
- VA mortgages
- USDA mortgages
- Conventional loans
- Freddie Mac Home Possible
- Fanne Mae HomeReady
- Non-QM mortgages
Compare low credit score home loans
Some mortgages are specifically designed to help lower credit applicants get into homes. Here are seven different options that may work for you:
|Mortgage Type||Minimum Credit Score||Recommended For|
|FHA Loan||500 (with 10% down)
580 (with 3.5% down)
|Borrowers with credit scores from 500-620|
|VA Loan||580 (can vary by lender)||Eligible veterans and servicemembers|
|USDA Loan||640||Buying a house in a rural area|
|Conventional Loans||620||Borrowers with moderate to good credit|
|Freddie Mac Home Possible||620||Low- to moderate-income borrowers|
|Fannie Mae HomeReady||620||Low- to moderate-income borrowers|
|Non-qualified (Non-QM) Mortgages||500-580||Borrowers who don’t qualify for a conventional or government-backed loan|
1. FHA mortgage: Minimum credit score 500
FHA loans — backed by the Federal Housing Administration — are specifically designed for lower-credit borrowers.
Most lenders offer FHA loans starting at a 580 credit score. If your score is 580 or higher, you only need to put 3.5% down.
For those with lower credit (500-579), it might still be possible to get an FHA loan. But you’ll need to put at least 10% down, and it can be harder to find lenders that allow a 500 minimum credit score.
Another appealing quality of an FHA loan is that, unlike conventional loans, FHA backed loans don’t carry “risk-based pricing”. This is also known as “loan-level pricing adjustments” (LLPA).
Risk-based pricing is a fee assessed to applications with lower credit scores or other less-than-ideal traits.
There may be some interest rate “hits” for lower credit scores, but they tend to be significantly less than for conventional loans.
For homeowners, this means lower credit scores don’t necessarily come with higher interest rates.Verify your FHA loan eligibility (Dec 3rd, 2020)
2. VA mortgage: Minimum credit score 580
VA loans are popular mortgage loans offered to veterans, service members, and some eligible spouses and military-affiliated people.
These loans do not require a down payment, nor any mortgage insurance. They also typically have the lowest interest rates on the market.
Technically, there’s no minimum credit score for a VA loan. However, most lenders impose a minimum score of at least 580. And some start as high as 620.
Similar to FHA loans, though, VA loans don’t have risk-based pricing adjustments. Applicants with low scores can get rates similar to those for high-credit borrowers.Verify your VA loan eligibility (Dec 3rd, 2020)
3. USDA home loan: Minimum credit score 640
Many homeowners are drawn to this third type of government loan thanks to its zero-down payment requirement.
Most lenders will require a 640 FICO score to qualify for a USDA loan, although some will go down to 580.
As with FHA and VA loans, however, USDA homeowners with a 580 credit score will be more carefully evaluated than those with a higher credit score.Verify your USDA loan eligibility (Dec 3rd, 2020)
4. Conventional loans: Minimum credit score 620
Non-government conventional mortgage loans require higher rates and fees for low credit scores.
Fannie Mae and Freddie Mac, the agencies that administer most of the conventional loans in the U.S., charge loan-level price adjustments, or LLPAs.
These fees are based on two loan factors:
- Loan-to-value (LTV): the ratio between the loan amount and home value
- Credit score
As LTV rises and credit score falls, the fee goes up.
For instance, a borrower with 20% down and a 700 credit score will pay 1.25% of the loan amount in LLPAs.
An applicant with a 640 score and ten percent down will be charged a fee of 2.75%.
The majority of lenders will require homeowners to have a minimum credit score of 620 in order to qualify for a conventional loan.
While conventional loans are available to lower credit applicants, the fees could make FHA much cheaper for those with credit scores on the low end of the spectrum.Verify your conventional loan eligibility (Dec 3rd, 2020)
5. Freddie Mac Home Possible: Minimum credit score 620
Released in March 2015, Freddie Mac’s first time home buyer program, Home Possible®, is helping buyers get into homes at a very low down payment.
Home Possible® is available for low and moderate-income borrowers and allows for a down payment of just 3%.
To qualify for the Home Possible® loan with reduced PMI rates, most lenders will require a 620 or better credit score.Verify your Home Possible loan eligibility (Dec 3rd, 2020)
6. Fannie Mae HomeReady: Minimum credit score 620
Released in December 2015, HomeReady is a great Fannie Mae loan program for low- to moderate-income borrowers, with expanded eligibility for financing homes in low-income communities.
Unlike Freddie’s Home Possible program, you don’t have to be a first-time homebuyer to qualify for HomeReady.
In addition to the low down payment option of just 3%, one of the most appealing traits of the HomeReady program is that it allows non-borrower household member’s income, regardless of their credit scores.
Most lenders require a minimum of 620 in order to qualify for HomeReady.Verify your HomeReady loan eligibility (Dec 3rd, 2020)
7. Non-qualified mortgage (Non-QM): Minimum credit score 500-580
The qualified mortgage rule, also known as the QM Rule, went into effect in 2014.
The requirements associated with QM loans were set forth by the federal government, and were meant to create safer loans by prohibiting or limiting certain high-risk mortgage products.
This rule is the reason most loans require a minimum credit score in the 600s as well as a down payment and/or mortgage insurance.
But there are still some “non-QM” loans available that have more flexible rules.
When banks don’t sell their mortgages to investors, they’re free to set their own requirements — like a lower credit score.
Thus, some non-QM loans can be found with credit scores as low as 500. But like with an FHA loan, you’re much more likely to find a lender who will approve you with a FICO score of 580 or higher.
If you’re looking for one of these loans, check out the specialty mortgage programs some banks offer that are neither conventional loans nor government-backed.
Or, work with a mortgage broker who can recommend products from various lenders that might fit your needs.
What are today’s mortgage rates?
Even if you have a lower credit score, you can still get a very low rate and payment in the current interest rate market.
Check your eligibility for one of today’s credit-friendly mortgage programs.Verify your new rate (Dec 3rd, 2020)
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