According to CreditDonkey, the average FICO score among Americans is 699, with any score under 550 falling into the poor credit category. If you are one of the 11.7 percent of the population who holds a credit score of 549 or less, you may have trouble when it comes to obtaining a mortgage. Fortunately, there are a few programs and lenders out there who are willing to work with clients who have a credit score of at least 500.
While it can be more difficult to get a mortgage with a 500 credit score, considering an FHA loan or working with a non-prime mortgage lender are options.
Review Your Credit Score
Before you contact a lender, take the time to review your credit score to get an exact number so you know where you stand. CNN reported that 18 percent of adults have never once requested to see their credit score. It makes a big difference if your score is 580 or just 500.
Obtaining a credit report is also a good idea because you'll want to check for any mistakes. If there are mistakes and you can get them fixed, your score will increase, and you'll potentially qualify for better mortgage terms.
Apply for an FHA Home Loan
Guidelines for Federal Housing Administration home loans are ever evolving, so while a 500 credit score may not have qualified you for a mortgage in the past, it may today. If your credit score is 580 or higher, you'll only need to save 3.5 percent of the purchase price of the home you're looking to buy. However, scores below 580 require a 10 percent down payment. The FHA makes an allowance for borrowers with "non-traditional credit history or insufficient credit" as long as they meet certain FHA requirements, such as having a debt-to-income ratio that does not exceed 43 percent.
Find a Non-Prime Mortgage Lender
If you don't want to go the FHA route, another option is to contact a non-prime mortgage lender. Companies like Citadel Servicing, Northstar Funding, Angel Oak Mortgage Solutions and Athas Capital accept applicants who have a credit score of 500 and who don't fit the mold for traditional mortgages. Depending on the company, you may be able to use bank statements in lieu of tax returns and count your savings account as income.
Improve Your Credit Score
Although you can utilize one of the programs mentioned above, it is a good idea to work on improving your credit score. The higher your credit score, the more loan options you'll have. Terms for individuals with higher credit scores are also better. You won't have to put as much money down, and your interest rate will be significantly lower, which makes your monthly mortgage payments lower.
If you have a credit score of 500, aim for 580 so that you'll be in the next bracket. If your score is 580, aim for 620, as many lenders have programs that are more favorable once you reach that score.
- FHA.com: Minimum Credit Scores for FHA Loans
- The Mortgage Reports: 7 Mortgages With Low Minimum Credit Score Requirements
- Bankrate: How to Get a Mortgage With Poor or Bad Credit
- Non-Prime Lenders: Mortgage Lenders for 500-579 Credit Scores
- Credit Donkey: 23 Startling Credit Score Statistics and Facts
- CNN: Americans Still Aren't Checking Their Credit Reports
- FHA.com: FHA Requirements
- Can I Get a Mortgage With Derogatory Things on My Credit Report?
- TransRisk Score vs. FICO
- What Is Tier 2 Credit Approval?
- Which Credit Score Is Used for a Mortgage?
- What Credit Score Do You Need to Get a Mortgage?
- PMI Credit Score Guidelines
- Can I Get a Mortgage with a 600 Credit Score?
- What Are My Options If I Have Bad Credit but Would Like to Own a Home?