If you have a 500 credit score, you have a good chance of qualifying for an FHA loan. However, there are some things you need to know before applying. The first thing you need to know is what lenders are allowed to do.
Most mortgage companies can only offer loans to people with a minimum credit score of 620. While that is a reasonable standard, some banks and other financial institutions have higher minimums. They are not required to accept FHA files with lower credit scores.
You will also need to know what you can do to improve your score. Among other things, you can improve your score by making all your payments on time. Also, consider reducing the amount of debt you have. This will help you demonstrate your ability to repay a mortgage. By cleaning up your credit record, you can increase the options for lenders.
Another way to help boost your score is to shop for a mortgage broker. Mortgage brokers work for a number of different banks and can find you a lender that can offer you a loan. Many have access to several different banks and can shop your file to them to see who has the best mortgage rates.
A key finding when searching for mortgage lenders is whether or not the lenders have an automated underwriting system. Automated underwriting systems are sophisticated computed systems that analyze your income and assets to determine your creditworthiness. All of your applications will go through this system, which renders an approve or eligible determination.
Some lenders require borrowers with credit scores below 620 to make a down payment of 10%. This is in addition to the 3.5% down payment that you will need to make on an FHA loan. For some lenders, this down payment is waived for borrowers with recent foreclosures, short sales, and bankruptcy.
Lender overlays are another factor that can influence your ability to qualify for an FHA loan. In general, mortgage companies have a lot more lending requirements than the government agency, FHA. There are also restrictions on lending to those with a recent foreclosure or bankruptcy.
When applying for an FHA loan, you will need to fill out a form with your personal information. Your application will be sent to an automated underwriting system. These systems are updated with new guidelines every year. Depending on the guidelines, your file may be approved or it could take a while for your file to be reviewed.
Even though lenders have a lot of flexibility when it comes to qualifying applicants, a credit score below 620 is considered poor. This is because borrowers with lower credit scores often default on their loans. Because of this, it can be hard to get a mortgage with a score below 620.
Getting a credit score above 620 can make it easier to qualify for a conventional loan. One benefit of a conventional loan is the low down payment requirement. Since you aren’t putting up as much money, you can buy a less expensive home and have a smaller monthly payment.