If you're still building up your credit or dealing with the effects of missing a credit card payment, you might wonder if having a credit score of 600 puts a home mortgage out of your reach. While this score is considered "fair" at best and means you probably won't qualify for a conventional mortgage program, the good news is that you still have options that make buying a home possible. You might consider applying for a Federal Housing Administration loan or Veteran Affairs loan if you qualify. You also have the option to try to raise your score and qualify for better loan terms and conventional loan programs.
Getting a mortgage with a 600 credit score is possible through the FHA and VA loan programs as well as through lenders specializing in borrowers with subprime credit scores.
Basics of Credit Scores
Typically ranging between 300 and 850, your credit score is determined by factors such as how many accounts you have, how old your accounts are, your payment history, your credit mix and overall debt. Although credit bureaus and financial data analysis sources categorize credit scores differently, Experian puts credit scores below 580 in the "very poor" category and scores between 580 and 669 in the "fair" category. At the higher end, a score in the "good" category ranges between 670 and 739, while a score 740 or higher would be "very good" or "excellent."
Having a score of 600 puts you in the "fair" category at best based on these guidelines. This means lenders see you as a bigger credit risk than people who have good credit, and this can make it harder for you to get loans as well as receive favorable terms. If you've recently made late payments or had accounts sent to collections, this makes lenders more reluctant to lend to you.
Impact on Mortgage Approval
It's possible to get a mortgage with a 600 credit score, but you'll likely need to seek options outside conventional loan programs, which usually require a score of at least 620. You'll also need to steer away from programs like the United States Department of Agriculture rural loans and special rehabilitation loan programs that have higher minimum scores. Your options with a 600 credit score will generally include FHA loans, VA loans and subprime mortgages, all of which have their pros and cons to consider.
If you do qualify for one of these mortgage programs, you can expect to pay a higher interest rate for your home loan, along with a higher monthly payment. For example, Forbes reported in June 2019 that someone with a 620 credit score would pay an interest rate of 5.736 percent compared to 4.147 percent for someone with a score of 760. This difference in interest may seem small, but it can add up to tens of thousands of dollars over the course of a 15- or 30-year mortgage.
In addition, lenders look at other factors along with your credit score to make the final application decision. You'll need to show that you've got a stable income, and cash on hand for your down payment, closing costs and reserves. Lenders will also look at your debt-to-income ratio and verify that the property's value meets or exceeds the desired loan amount.
FHA Loan Program
Since there is no official minimum FHA loan credit score, choosing the FHA loan program can be a good option if you have a credit score of 600. Along with allowing for lower credit scores, this program has a higher total debt-to-income ratio of 43 percent, which can make it easier to qualify if you have excess debt. Another perk is that someone with a 600 credit score would only need to put down 3.5 percent of the property's price versus the 10 percent someone with a score under 580 would have to put down.
The FHA program has qualifying income and loan limits that adjust annually and depend on the property's location and cost-of-living. The property must be your primary residence where you'll reside for at least a year, and it must pass an FHA-approved inspection that shows the house meets government standards. You'll also be responsible for a mortgage insurance premium both at closing and with your monthly mortgage payment; you'll pay this premium until you pay off the loan, or for 11 years if you had made a down payment of over 10 percent.
VA Loan Program
If you actively served in the military, or your military spouse passed away due to a military-related incident or disability, you may qualify for the VA loan program. The Lenders Network notes that this program has no official minimum credit score, so lenders get more discernment over whom they approve. If you have a 600 credit score, shopping around for a lender who will give you a VA home loan can offer benefits such as lower closing costs and interest rates, no private mortgage insurance and the option for 100 percent financing, meaning you won't have to come up with a down payment. In addition, your total debt-to-income ratio can be 41 percent with this program.
Like with FHA loans, you'll only be able to get a VA loan for your primary residence, and Veterans United warns that, due to misunderstandings, some home sellers may feel insecure about accepting offers from VA loan applicants. VA loans also come with a funding fee – ranging from 1.25 percent to 2.15 percent for first-time borrowers – that you won't incur with an FHA loan. However, you get an exemption if you're being compensated for a disability resulting from military service, or if you're a surviving spouse whose partner died from a military-related disability or incident.
Mortgage Broker for Bad Credit
If you don't qualify for an FHA or VA loan, or you want to seek other options, you could contact a mortgage broker for bad credit applicants. According to SmartAsset, these brokers may offer subprime mortgage programs with longer terms of 40 to 50 years and interest rates much higher than conventional, FHA and VA loan programs; they can also require a down payment as much as 30 percent of the home's cost. Such mortgages may also have adjustable interest rates and have a homebuyer's counseling requirement.
Since subprime mortgage programs cost you much more over time in interest and can require a hefty down payment, they should be viewed as a last resort. Before deciding to take on one of these subprime mortgages, try using an online mortgage calculator to find out how much interest you'll end up paying versus other loan programs.
Boosting Your Chances of Approval
A 600 credit score isn't far off from the low-end score of 620 needed for conventional loans, so waiting a bit and practicing good financial habits can open up options for you. Also, raising your score can put you at an advantage for getting better mortgage rates and having a lower monthly payment. So, taking a few steps to boost your credit score – and keep it from dropping any further – is a good idea.
If your credit score is low due to high levels of credit card debt, try making some extra payments or even paying off accounts if possible. Not only will this boost your score, but it also means less debt you have to worry about paying along with your new mortgage payment.
At the same time, avoid taking on more debt like car loans, opening new card accounts or closing existing accounts, since you risk increasing your back-end debt ratio and seeing your score drop further. Also, check your credit report to make sure there aren't any errors that could hurt your score and chances of mortgage approval.
- MarketWatch: This Is How Much Bad Credit Affects Your Mortgage
- LendingTree: Pros and Cons of FHA Loans
- Experian: How to Improve Your Credit Score
- Credit.com: What Credit Score Do I Need to Buy a House?
- myFICO: Get the Score Lenders Use to Evaluate Your Home Mortgage Loan
- Investopedia: 5 Things You Need to Be Pre-approved for a Mortgage
- The Lenders Network: Credit Score Needed to Buy a House in 2019
- Rocket Mortgage: How to Get a Mortgage Preapproval
- Veterans United: VA Loan Pros and Cons
- SmartAsset: What Is a Subprime Mortgage?
- Experian: What Is a Good Credit Score?
- Forbes: How Your Credit Score Affects Your Mortgage Rates