In 1934, the Federal government passed the National Housing Act as part of the “New Deal,” which was President Franklin D. Roosevelt’s massive plan to provide relief from the Great Depression, relief that would come, it was hoped, through government-funded projects and public works. Part of the act was the creation of the Federal Housing Administration (FHA), an agency that works to improve housing conditions and increase the availability of homeownership.
The FHA is one of the most important organizations in the real estate industry, but they don’t actually lend money. An “FHA loan” is not money lent out by the agency, but rather a loan that has their support through insurance. Instead of lending money to would-be homeowners, the FHA provides insurance for lenders who give out loans.
The insurance protects the lenders against financial loss that would come from default on the loan, but they don’t simply insure any loan that comes across their collective desks. To have a loan insured, lenders need to make sure that specific guidelines and requirements are met. They can still write loans that don’t fall within the FHA’s guidelines, but these loans will not be supported by the FHA.
For FHA loans, as well as other loans in general, you need to have a quality credit score. However, you can still get an FHA loan with a low score. In fact, it’s possible to get FHA loans with a 500 credit score.
To do so, however, you need to understand FHA loans, credit scores, and the loan-approval process.
FHA Loans with a 500 Credit Score
How Credit Scores are Calculated
Why are credit scores so important? To understand this issue, you need to look at how credit scores are calculated. The credit scoring system was created by FICO, an organization that came up with a calculation system based on a person’s previous dealings with debt. Using a complex equation, they came up with a three-digit scoring system for assessing risk; the higher the score, the more likely a person will be to pay back the loan, statistically speaking. The scores range from 300 to 850, and they give lenders a clear, easy-to-understand benchmark for writing loans.
The credit score is comprised of five factors: payment history, amounts owed, credit history, types of credit, and new credit. These factors, however, are not weighted equally. Payment history makes up 35% of the total score, while amounts owed is a close second at 30%. After that, there is a sharp drop off, as length of credit history makes 15%, while credit mix and new credit are 10% each.
Payment history is obviously the most important. This simply means that you need to maintain a consistent history of making payments on time; if payments are late, your score will drop sharply. If your account balances approach the total limit, your score will drop even more. Credit history is simply how long you have had credit; the longer the better, at least as far as your score is concerned.
While having strong credit it essential, securing FHA loans with a 500 credit score is possible, but it starts by understanding the basic requirements from the FHA…
Requirements for an FHA Loan
There are many requirements for FHA loans, but a specific credit score is not one of them. However, borrowers looking to purchase a home with an FHA loan and a down payment of less than 3.5% will need to have a minimum FICO score of 580. This does not mean that a score lower than 580 automatically eliminates you from the program. If you have a 500 FICO score, you will need a 10% down payment, which will help the lender compensate for some of the risk created by lending to a low-score borrower.
Credit scores and down payments are far from the only factors, however. First, you must show that you have a steady employment history for the past two years, and new FHA loans are only available on loans that will help purchase a primary residence. (No vacation homes or investment properties.)
To be eligible, the home must have a property appraisal from an FHA-approved appraiser, and the front-end mortgage must be less than 31% of your total income. However, if you work with your lender you many be able to get this pushed to 40%. Your backend ratio, however, needs to be less than 43% of your gross income, but you may be able to get this pushed to 50%.
If you have a credit score of 500 to 579, you’ll need to bring a 10% down payment. You’ll have to be at least two years from bankruptcy, but exceptions can be made if you can demonstrate extenuating circumstances.
Getting Approved for an FHA Loan
To get approved, you’ll need to follow some basic step. While the details may change depending on the specific loan and your lending agent, these are a few of the steps you’ll need to complete:
First, you’ll have to contact a lender that is approved to make FHA loans. Next, the lender will help you complete a standard loan application along with an addendum for the specific FHA program. At this point, the lender will likely request a variety of financial documents, which can include IRS forms, W-2s, and bank statements.
Every FHA mortgage has a case number that will be assigned. This will identify the loan and the borrower. Before the loan is written, a property appraisal will be required to verify the value of the home.
Finally, there will be the mortgage underwriting and underwriting decision. Once these are complete, the lender will finalize the closing process, at which point you will sign all the final documents required to create the loan. At this point, you’ll also have to deliver a check for your closing costs.
Making FHA Loans with a 500 Credit Score Possible
You deserve the best possible loan no matter what your credit score. Work with San Diego Purchase Loans and we’ll help you secure an FHA loan, even if your score is between 500 and 580!
Chad and his team were very attentive to all of my needs, they called , emailed and checked in often. No question was left unanswered! Maria was a superstar! taking all my calls no matter the time or day and walking me through every process. The follow through was amazing and I am just so happy that my realtor referred them to me. I was originally referred to another lender that pretty much had no time for me nor did they even bother to try and find me the right loan since I am a widow with one income and a first time buyer with so so credit. I am completely happy with my loan and everything they did for me! Thank you Chad, Maria and Karina for all you did!
Chad and his team are fantastic!
Chad and his team assisted me with the financing of my condo. Every member of Chad’s team was extremely professional, highly competent, super responsive, and friendly. They realize that financing a home can be a stressful experience and they do their best to alleviate that stress by keeping you in the loop on everything. They were great about giving me frequent updates on the status of my application. In addition, they happily answered my questions. At one point, when I felt like I was pestering Chad with questions, his response was a friendly, “keep them coming!” And he meant it!!! Likewise, Maria and Karina were just a pleasure to work with as well! This team is like a fine-tuned machine. Thank you so much for all of your help!!!
As a first time home buyer, I wasn’t sure what to really expect, but Chad and his team made the process very clear and easy. Once the process was over, they didn’t just vanish either. They kept in touch and looked for opportunities that may benefit me. A couple years later, they found me a great refinance opportunity that saved me a lot of money! Once again, the process is long and grueling, but Chad and his team made it as painless as could be. Any barrier that I encountered, they found a quick solution to make it happen. Mortgages are a huge commitment and I wouldn’t pick any other team to help me make the right decisions.”