If your credit isn't the best, one day you may find yourself thinking, "My credit score is 580, can I buy a house?" The short answer is, yes, but it is probable you’ll have a harder time than someone with a better score. Depending on the type of mortgage you are trying for, if you have a credit score of 580, you will likely need a co-signer to help you qualify for the loan. However, this isn’t always the case as borrowers with less-than-perfect credit do have options available to them.
With a credit score of 580, you will likely need a co-signer for a conventional loan, but you may be able to qualify for an FHA loan without one.
Why Credit Scores Matter
When you borrow money from a lender to pay for a home, the lender is assuming risk by loaning you the money to pay for it. Your credit score allows the lender to assess your likelihood of defaulting on the loan by using the score assigned to your track record of repaying debts and obligations. The higher your score, the better you are at paying your credit cards or loans consistently and in a timely manner. The lower your score can indicate you likely have missed a few payments or defaulted on a loan, and this makes you a riskier borrower than someone who has demonstrated the ability to consistently pay their debts on time.
Different lenders and loan options have differing credit score minimums or requirements before you can be approved for a mortgage. Generally, a loan for a 580 credit score will require a co-signer to act as insurance for the lender. In case you default on the loan, she will be obligated to repay it. If you are unable to raise your score before you decide to apply for a home loan, or do not have a co-signer, then you may want to consider an FHA loan.
What Are FHA Loans?
Federal Housing Administration, or FHA, loans are loans that are backed by the federal government. This means if you default on the loan, the Federal Housing Administration will pay it off then take possession of the property to auction it in an attempt to recuperate some of its losses. FHA loans are typically geared toward borrowers with low-to-moderate income, less-than-stellar or newly established credit as well as first-time homebuyers. FHA loans also typically have lower minimum down payment and credit score requirements than their conventional loan counterparts.
FHA Credit Score Requirements
It is important to note that the FHA does not directly provide mortgages; instead, it merely insures them in the event you default on the loan. In order to obtain an FHA loan, you will need to find an FHA-approved lender. As long as you have a credit score of at least 580, you can get an FHA loan from most approved lenders – given other requirements such as verifiable income and steady employment are met.
With a score of at least 580, you are able to be approved for a mortgage with as little as 3.5 percent down payment. If your score is under 580, you can still obtain financing, but you will have to put down 10 percent and may require a co-signer.
Be Wary of Subprime Loans
If you’re really desperate to get a home loan, another (albeit last resort) finance option for those with poor credit is a subprime loan. Subprime loans are marketed toward people with some rough patches on their credit history report. You can typically expect to pay a higher interest rate and have less favorable terms than both FHA and conventional loans. Before deciding to go for a subprime loan, first consider improving your credit score by taking a look at your credit report for inaccuracies and paying down some debt.
The higher interest rate of subprime mortgages can make your monthly mortgage payment much higher, which in the long run might cost you thousands of dollars more than if you improved your credit and tried to obtain more favorable financing.
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