Mortgages For A 580 Credit Score: Available, With A Catch
If you have a 580 credit score, buying a house can be a challenge.
And it may be frustrating, too, because while the FHA program guidelines allow a 580 credit score, the average FICO score of an approved FHA purchase mortgage is 686, according to analysts at Ellie Mae.
But certain programs today allow you to become a homeowner despite lower credit.
580 Credit Score With FHA
Officially, you can get an FHA home loan with a low credit score. That does not mean that you can get an with bad credit.
FHA allows you to get a 96.5 percent mortgage with credit scores down to 580, and requires ten percent down with a FICO as low as 500.
However, the reason for your low score cannot be that you have burned creditors right and left.
Low Scores Vs Bad History
FHA guidelines state that, “If a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.”
If your 580 FICO is the result of a limited credit history, too many new accounts, or other relatively harmless reason, you can get an FHA home loan if you meet all other requirements.
If your low score is due to bad credit in the distant past, and you’ve been responsible with your payments for at least a year, you may be able to get an FHA mortgage.
FHA instructs lenders, “A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred.”
What Are FHA Compensating Factors?
So if your credit history is not so great, what are these magical “significant compensating factors” that might get you over the hump?
- A larger-than-required downpayment (try 5% - 10%)
- Lower debt-to-income (DTI) ratios (38% is a good target)
- Current housing expense higher than it would be with the new loan
- Savings to cover several months of payments if income is interrupted.
These are not the only compensating factors, but they are probably the most influential.
Making Up For Lower Scores
The average downpayment for an approved FHA purchase loan is four percent, and the average mortgage payment equals 28 percent of the applicant’s gross income.
On average, all monthly account payments (including the new mortgage) for approved borrowers equal 42 percent of their gross income.
If your FICO is significantly lower than 686 (average for approved FHA loans), your downpayment and DTI should probably be better-than-average to get approved.
Shop Around: FHA Lender Guidelines Vary
While mortgage lenders are allowed to approved loans for 580 credit scores, they aren’t required to.
Because lenders can set higher minimum credit scores for FHA loans, if yours is on the low side, you may have to contact more lenders.
It makes sense to check with several FHA lenders and compare rates, anyway. Just because your FICO is 580 doesn’t mean you shouldn’t get the best deal available to you.
580 Credit Score: Alternative Products
While the FHA program is relatively forgiving and inexpensive, not everyone can qualify for a home loan.
There are other products for these buyers — non-prime loans.
These are not “anything goes” loans, but your 580 credit score can be the result of some bad decisions, and you can still get approved for a mortgage.
Some products allow scores as low as 500.
However, you will need a bigger downpayment — plan on at least 15 percent if you’re credit is marginal, and more if it’s really stinky.
Plan also on paying higher fees and interest rates. One regional non-prime lender rates start at about six percent (and go up, depending on your profile), and loan fees are about two points higher than FHA mortgage costs.
What Are Today’s FHA Mortgage Rates?
FHA and other mortgage rates are holding fairly steady as of this writing. Of course, the better your credit score, the more lenders you can choose from. That makes it easier to find a great deal.