Many home buyers are surprised by the wide range of low-credit home loans that are available today.
Lenders will approve borrowers with low credit scores, such as as 580 or below. Some Mortgage Brokers will even lend up to 500-579, though these lenders can be difficult to find.
Your options are even greater if your credit score is above 600 To qualify for low-rate conventional mortgages, you will need a credit score of 620. You can apply for any type of home loan with a credit score of 680 or higher.
Low credit home loans available
Some mortgages are designed to assist those with lower credit scores get into their homes. These are seven options that might work for you.
These are the 7 best mortgage loans to bad credit borrowers
FHA mortgage: Credit score minimum 500
FHA loans, which are backed by Federal Housing Administration, have the lowest credit score requirements for any major home loan program.
FHA loans are available from most lenders starting at 580 credit scores. You only need 3.5% down if your credit score is 580 or greater
FHA loans may still be available for those with less than perfect credit (579-579). You will need to pay at least 10% down and lenders may not allow you to have a credit score of 500 or less.
An FHA loan has another appealing feature: unlike conventional loans, FHA mortgages are not subject to risk-based pricing. This is also known “loan level pricing adjustments” (LLPAs).
A fee is charged for loan applications that have lower credit scores or other less desirable traits.
Although there may be interest rate “hits”, they are usually much lower than conventional loan rate increases for FHA borrowers with lower credit.
FHA loans don’t require poor credit to qualify for higher interest rates.
VA mortgage: Minimum credit score of 580_620
VA loans are a popular choice for veterans, military personnel, eligible spouses, and military-affiliated borrowers.
These loans don’t require any down payment nor ongoing mortgage insurance payments and are backed by the Department of Veterans Affairs. These loans typically have the lowest interest rates available.
Technically, a VA loan doesn’t require a minimum credit score. Most lenders require a minimum credit score of at least 580. Many lenders start at 620.
VA loans are similar to FHA loans but don’t include risk-based pricing adjustments. Low-credit applicants can receive rates comparable to those offered to high-credit borrowers.
USDA home loans: Minimum credit score of 640
USDA loans are very popular due to their low interest rates and zero down payment requirements.
To be eligible for a USDA loan you will typically need a score of 640. However, minimum credit requirements can vary from lender to lender.
The U.S. Department of Agriculture backs these mortgages with the aim of increasing rural homeownership. You must purchase a home in a “rural” zone to be eligible. However, some suburbs are allowed.
If you earn too much, a USDA loan won’t work. Your household income cannot be higher than the area’s median income.
Conventional loans: Minimum credit score of 620
For borrowers with poor credit scores, non-government conventional mortgage loans have higher interest rates and fees.
Fannie Mae, Freddie Mac and other agencies that manage conventional loans in the U.S. charge loan-level price adjustments (LLPAs).
These fees are based upon two factors:
- LTV (Loan-to-value) is the ratio of the loan amount to the home’s value
- Credit score
The fee rises as LTV increases and credit scores fall.
A borrower with 20% downpayment and 700 credit rating will pay 1.25% in LLPAs.
A fee of 2.75 percent will be charged to applicants with scores below 640 and 10% down.
These fees result in higher interest rates for borrowers. This means that applicants with lower credit scores will pay higher monthly payments and more interest over the loan’s life.
Most Beverly Hills Mortgage Brokers require that homeowners have a minimum credit score (620) in order to be eligible for a conventional loan.
Although conventional loans can be obtained for those with lower credit scores, FHA loans are often cheaper for those with poor credit.
Freddie Mac Home Possible: Minimum credit score 620
Home Possible, Freddie Mac’s first home buyer program, was released in March 2015. It helps buyers to get into homes with a low down payment and moderate credit.
Home Possible is an option for low- and moderate-income borrowers. It requires a down payment of 3%.
Most lenders require a minimum credit score of 620 to be eligible for the Home Possible loan. This will allow you to get lower private mortgage insurance (PMI), rates.
Fannie Mae HomeReady: Minimum credit score 620
HomeReady was released in December 2015. It is a Fannie Mae loan program that’s great for low- and moderate-income borrowers.
HomeReady is not a program like Freddie’s Home Possible. You don’t need to be a first-time buyer to get HomeReady.
This loan type is attractive because it has a 3% minimum downpayment requirement. However, income from your household can be included underwriting, regardless of credit history.
Instead of relying on your monthly income or the income of your co-borrower, your DTI ratio can also include your income from your adult children and parents.
To be eligible for HomeReady, most lenders require a minimum credit score 620.
Non-qualified mortgage (Non QM): Credit score minimum 500-580
In 2014, the qualified mortgage rule (also known as QM Rule) was put into effect.
Federal government set the requirements for QM loans. These rules were created to make loans safer by limiting or prohibiting certain high-risk mortgage products.
This is why most loans require a minimum credit score of 600, as well as a downpayment and/or private mortgage insurance.
There are still non-QM loans that offer more flexibility.
Banks that don’t sell mortgages to investors are free to establish their own criteria, such as a lower minimum credit score requirement.
Some non-QM loans are available for those with low credit scores, such as 500. You are more likely to get approved for an FHA loan if you have a FICO score 580 or higher.
You can find these loans by checking out specialty mortgage programs offered by banks that are not government-backed or conventional loans.
You can also work with a mortgage broker to recommend products from different lenders that may be suitable for your needs.