You’ll hear it from everyone you talk to. Your friends and family will all tell you that if you have a low credit score, purchasing a home is nearly impossible. If you are fortunate enough to get approved, they say, you’ll pay an outrageously high interest rate.
So why even try?
Because getting a affordable loan, even with a 500 FICO credit score, is possible.
While having a high credit score certainly makes the approval easier, it’s simply false to believe that you can not get a loan if you have a FICO score as low as 500. In fact, there are multiple options available from government agencies, including the FHA, VA, and USDA, that can help you get the affordable mortgage you deserve.
Let’s take a look at some of these options to help you start the path to home ownership.
Update: As of 2019, loans supported by the USDA (“USDA loans”) require a 600 credit score. Information on this article may be outdated. Please call our staff for further details.
Mortgage Options for Borrowers with Low Credit Scores
Federal Housing Administration
The Federal Housing Administration, or FHA, is a government agency that sets standards for lending and underwriting practices. In an attempt to help low-credit borrowers secure an affordable mortgage, the agency has made changes to the requirements. Previously, a score of at least 580 was required to make the minimum 3.5% down payment requirement.
With a new policy, lenders can lower the requirements down to a 500 FICO score. There is, however, an important requirement that these borrowers must meet: the 10% down payment.
FHA High Balance
With the high-balance option from FHA, you can secure a loan even if you have a 500 credit score. This option is available for 90% loan-to-value mortgages, so you’ll need to have a 10% down payment towards the property. There is also a program for 580 credit scores that only requires 96.5% loan-to-value and a 3.5% down payment. With this program, there are no restrictions on gift funds, and the loan is assessed using manual underwriting and non-traditional credit. W-2 programs are also available and manufactured home may be eligible for purchase.
This is a useful program that can help if you have a low FICO score. With this option, there is actually no minimum FICO score if there have been no late payments in the past six months. Non-owner-occupied property is available for loans up to 125% of the property value, and odd or unique year terms are available. This program can be closed any day of the week.
FHA 203k Full
Like the high-balance program, this is available for 500 FICO scores but requires a 90% loan-to-value ratio. For 580 score it only requires 96.5% loan-to-value. For these loans, there must be a minimum total repair cost on the property of $5,000, and the maximum total repair cost is 50% of the “subject to” value, which is an appraised value. To qualify for this program, you’ll need a debt-to-income ratio at or below 45%. However, if your FICO score is 620 or higher, the debt-to-income can go as high as 49%.
U.S. Department of Veterans Affairs
The United States Department of Veterans Affairs, more commonly called the VA, is an important organization that provides healthcare assistance and benefits to eligible veterans and their families. The department also assists veterans with housing by insuring affordable and accessible financing options, giving lenders better incentives to make loans to veterans.
If you are a veteran and have a FICO score at 500, you will want to review the VA’s options, as they are often more flexible and forgiving when it comes to credit.
With the VA Limited program, you can actually receive 100% financing for your property, even if you have a 500 FICO score. This program has a cash-out of 100%, making it incredibly useful for our nation’s veterans who may be struggling with their credit. There is no restriction on gift funds, and manual underwriting is available. There are also options with non-traditional credit. With this program, there is a W-2 option as well. Veterans can exceed county loan limits up to $1.2 million, and manufactured homes may be available for purchase with this program.
The Interest Rate Reduction Refinancing Loan (IRRRL) is an important program for lowering interest rates by refinancing a traditional loan into a VA loan. If you are current during the month that the loan is closed, then there is no minimum requirement for FICO scores and no asset verification will be required. Non-owner-occupied property is acceptable for this program with financing up to 125% of the property’s value. Odd year terms are available, and you can close on any day of the month.
U.S. Department of Agriculture
The U.S. Department of Agriculture has a rural development program designed to help borrowers acquire financing for eligible homes in rural areas. These programs can be beneficial for people with low credit scores, and you don’t necessarily have to work in farming to qualify.
With the USDA program, you can get 100% financing on a property even when you have a FICO score of 550. There is no down payment for qualified borrowers, but income limits may apply, as this program is intended for people with low to moderate incomes. To qualify, the property must be in a USDA-approved area, which is usually a rural location. Manufactured homes may be eligible for the program depending on the specifics of the house itself as well as the property.
The USDA also offers a streamlined system with no minimum FICO requirements if there have been no late payments over the past 12 months. With this program, there are no loan-to-value restrictions, but it is only available on 30-year terms only. There is also a finance discount points option.
Helping You Get Approved, Even with Low FICO Scores
San Diego Purchase Loans is proud to assist borrowers who may be struggling with low credit scores. We can offer assistance on FHA, VA, and USDA loans, as well as programs to fit many different needs and budgets.
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