Can I Get a Mortgage With a 500 Credit Score?

by William Pirraglia, Demand Media
    Getting mortgage loans with a 500 credit score is a challenge.

    Getting mortgage loans with a 500 credit score is a challenge.

    Should you have a 500 credit score, you'll face a serious challenge getting a mortgage. On paper, you qualify for only the worst of the worst, if you can even locate a lender willing to make a mortgage. Before the real estate/mortgage "bubble" burst in 2007, you had a few options, but most, if not all of those have since disappeared. This credit score is below that which most lenders will offer a reasonable mortgage.

    Credit Scores

    While some experienced lenders might support the view that credit scores do not a good borrower make, most banks and mortgage lenders rely heavily on your credit score to approve/deny an application. The reason is simple: Analyzing credit scores has shown -- for better or worse -- to be a statistically accurate benchmark of future repayment potential. Loan delinquencies for borrowers having credit scores lower than around 620 are dramatically higher than those with scores above the 620 level.

    Secondary Market Considerations

    Since most mortgages are sold to the secondary market -- Fannie Mae, Freddie Mac, or private investors -- lenders must conform to the criteria of mortgage buyers. Prior to the mortgage "bubble burst" of recent years, there were secondary market buyers willing to take the chance of purchasing mortgages of borrowers with a 500 credit score. Those mortgage buyers are either out of business or have drastically increased their minimum credit score requirements.

    500 Credit Score Mortgages

    Short answer: They no longer exist. However, like most products, you might find a mortgage with unattractive financial terms. If you can find a mortgage available to borrowers with a 500 credit score, you'll want to keep it short-term -- a year or less -- in most situations. You'll find that the only mortgages available will typically be interest only -- very high interest, around 20 percent or more -- loans with a one year maturity. These are called "hard money" mortgages. Seldom used for home purchases, they are designed to help homeowners save their house from foreclosure.

    Focus on Increasing Credit Score

    If you are a prospective real estate purchaser, you might want to delay your plans until you increase your credit score. In a purchase, you will risk your deposit money, time, and result by applying for a mortgage with a 500 credit score. Your time and funds will be better spent paying down outstanding debts to increase your credit score above 620 to allow you to qualify for a more reasonable mortgage loan.

    Saving Your Home from Foreclosure

    The only mortgage loans available to those with credit scores around 500 are those that might help you stave off foreclosure. Private lenders are sometimes willing to make interest-only mortgages for the short-term, at very high interest rates -- 20 percent or more -- to help homeowners from losing their homes. If your score hovers around 500, these loans may be home savers.

    About the Author

    For 34 years Bill Pirraglia served as a senior executive in the banking industry. Since 2005, he has authored articles, blog entries, tips and advice columns, SEO web copy and two published books. He specializes in personal and business finance topics, along with legal articles for clients large and small.

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