The Best Loans for Low Credit Scores

If you’ve been looking for loans to buy a home but your last credit check wasn’t so great, then you may need a bad credit loan. However, you’re not alone. Currently, around 16% of Americans have bad credit (300-579) and 18% have fair credit (580-669). That’s over 1/3 of potential homebuyers in this country. Therefore, there are solutions out there for people who don’t have excellent credit.

We checked the internet for the home loan options that are available for people with credit report scores in the 500-600 range.

What are the minimum credit score requirements for home loans?

Though every lender has different loan terms, some general guidelines and best loan offer types exist for bad credit. First-time home buyers are eligible for government-backed FHA loans, which can tolerate lower credit scores (aka higher risk) than other types. Here is the typical minimum credit score for each loan type to qualify for a loan or to refinance:

  • FHA Loan: 500
  • Conventional Loan: 620
  • VA Loan: 640
  • USDA Loan: 640
  • Jumbo (Conventional) Loan: 700

These numbers are just general guidelines. The minimum credit score accepted will also be based on other conditions, such as your credit history,  debt-to-income ratio (DTI), minimum down payment, payment history, credit utilization rate, number of on-time payments, and other financial eligibility factors. You will get the exact numbers when you speak to your lender personally. Also, note that different credit bureaus may report slightly different scores.

Is any credit score too low?

While some programs may clear buyers to handle loan payments with scores around 500, most do not typically accept anything lower than 600. Anyone with a score below 600 will have to seriously prove that they are financially secure. If the applicant doesn’t have a lot of margin or assets in their bank account, then mortgage companies may prefer a higher score, like in the 680s or 700s to be more confident about repayment capabilities.

Also, if the lender accepts someone with a low credit score in the 500s, they may require that the buyer pay off any collections, judgments, and most liens before closing day. They may also require more cash upfront. Loan rates improve as your credit score does, so working on this figure will benefit you in the long run.

What if your score is too low?

There are many ways to build credit back up to a reasonable number. After conducting a credit inquiry, you can find out the weaknesses in your report and work on those factors. Overall, try to reduce debt as much as possible, make payments on time, don’t let anything get to collections, and avoid making large purchases that can greatly impact your debt-to-income ratio.

To improve your score, take care of any late payments, negotiate payment plans with collections, and explore debt consolidation for any loans that you have trouble keeping up with. Autopay is a wonderful option to keep you on top of bills that are easy to forget, like Netflix or a credit card payment. Though progress may seem small in the short term, being steadily responsible for your personal finances will move the needle in your favor.

FHA: The Best Loan for First-Time Buyers with Low Credit

First-time homeowners get some of the best perks, including the ability to qualify for an FHA loan. This type is backed by the government and insured by the Federal Housing Administration, which lowers the risk for lenders. For FHA loans, applicants usually qualify with a lower credit score than for conventional loans.

Though 500 is the rock-bottom score that can qualify, each mortgage lender has its own credit minimums for FHA loans. If your score is at the absolute minimum, you will need to bring more to the table, such as having an excellent debt-to-income ratio, a lucrative job that gives you plenty of margin, and a record of paid-off debts. The higher your score, the easier it is to get approved for a mortgage loan.

Typically, individuals with a 500 on their credit report have taken a hit due to bankruptcy or outstanding liens, such as unpaid credit card debt or missed payments on a vehicle. If you can promise to pay off any collections or liens on your account before closing, you can work around these lower scores.

For this reason, the average credit score for an FHA loan is around 668. This is why it’s best to try and heal your credit score as much as possible before you apply for any mortgage, even if it’s an FHA government-backed loan.

USDA or VA: The Best Loan Programs for Non-First Time Buyers with Low Credit

If you aren’t a first-time homeowner, you can’t take advantage of an FHA loan. However, you can get access to other types of government-backed loans: USDA and VA.

  • VA loans are backed by the Department of Veterans Affairs. They apply to anyone who serves or has served in the armed forces. These loans don’t have an official credit minimum, but the typical acceptance score is around 640. One of the best things about a VA loan is that you can get a house for $0 down, which results in thousands of dollars in savings at closing.
  • USDA loans are backed by the U.S. Department of Agriculture and can be used when you buy a home in a qualifying rural area. They are one of the least-known loans but have some excellent perks. Not only do you get some competitive interest rates, but you can also pay zero down. To qualify, you should not have had any accounts sent to collections last year. If your credit score is above 640, you can get processed fairly easily, but anything below that will go under more rigorous scrutiny. The house in question must also be below 2,000 square feet in area.

Another Option: Conventional

Any home loan the government does not back is called “conventional.” Jumbo loans, which cover any mortgage above the Federal Housing Finance Agency’s loan limits, are also included in this category.

  • Conforming conventional loans: Conforming loans stick to Fannie Mae and Freddie Mac guidelines, which make it possible to get lower interest rates and monthly payments. The average FICO score for a conventional loan borrower is 749, but the minimum credit score is 620. The lower the score, the more you must bring to the table to get approval.
  • Non-qualified mortgages are another type of mortgage for individuals with lower credit scores or those with a hard time proving an income, such as self-employed workers. If you can prove your ability to pay a loan and the lender agrees, you can even get a loan without credit.

How To Get Installment Loans with Bad Credit Approved

If you have bad to fair credit, it’s tougher to have a loan officer prequalify you for a home loan. If your lender gives you a pre-qualification letter, the official application process begins, which can take between 30 to 45 days. During this time, your loan officer will contact you frequently to get information to facilitate the underwriting process. It’s important to check your phone and email frequently during this time and to be ready to give information. Here are some other ways to ensure you get approved after passing the pre-qualification stage.

Prepare Your Documents in Advance

Having the necessary documentation ready will speed up the application process. For instance, have your most recent bank statements, your W2s, tax statements, 1099-NECs, and any other financial documentation relevant to your approval. Acting quickly will speed up the mortgage application process and minimize stress.

Offer The Highest Down Payment You Can

Though a small down payment may be necessary for some borrowers, you should put more money down if you can. A large down payment can help you get a loan even when your credit score isn’t ideal. For instance, if you have a credit score of 620 and want to put zero down for a VA loan or the minimum 3% down for a conventional loan, you will have a harder time being approved than putting down 20% or more. Proving your financial fitness like this helps boost the lender’s confidence.

For example, though FHA loans allow 3.5% down payments, credit scores between 500 and 579 require a 10% down payment. Going beyond the bare minimum will improve your mortgage rates through paying points down too, so count is as a win-win.

Ways To “Hack” Bad Credit

What if your credit score is lower than 500? Your homeownership journey doesn’t have to end. You can still get creative and find a way to qualify to buy a house.

  • Co-Sign: When your credit score is too low, you can get the help of a trusted friend, family member, or partner with a better credit score. Suppose the cosigner already has their own place. In that case, the co-borrower should be aware that they are entering an agreement where they would be responsible for missed payments and can have their credit score affected by issues regarding this property.
  • Pay Cash: Who needs to worry about your credit score when you bring the entire sum to the closing table? No lender, no problem! But how do you pay for a house with cash? The process is more straightforward if you can tap into equity and downsize, which can be done through our unique incentive programs like Sell & Stay, which help you cash in on your current home and use the money toward another house. You may also be able to get enough cash to boost your chances with a non-qualified mortgage.
  • Pursue a modest loan amount. The larger the loan, the more stringent the borrowing requirements. Plus, it’s easier to pay down your mortgage to avoid higher interest rates when your borrowing needs are lower. This also leads to lower mortgage payments and more mortgage options.
  • Use a line of credit: If you already own a home and have substantial home equity, you can borrow funds from your home’s value to make a large down payment, pay down high interest rates, and ultimately help financial institutions have confidence in your loan approval.

Life happens, and that’s why there are still ways for borrowers with bad credit to get the loan approval they need.

How do you get good credit?

Though it’s common for credit scores to increase or decrease in small increments due to various factors, missed payments or bankruptcy can severely affect your FICO score. It can take up to 7 years to recover from the impacts of significant events, too, even when you do everything to get on the right track. However, if you have a bad credit score, know that homeownership isn’t out of the question.

Preparing Your Way to Home Ownership

Now that we’ve spoken a lot about finding the best type of loans for your situation, did you know there are other ways to improve your chances of getting a home?

Our special incentive programs eliminate risk factors like home sale contingencies and can help you offer a hefty sum for your down payment. We also offer a program called Guaranteed Lease, which secures you an extra monthly side income that can boost lender confidence while eliminating a home sale contingency.

Bring in all the experts. We want to help!

It’s also a good idea to contact your preferred lender or credit union and take their advice on improving your credit score, saving up enough for your down payment, and getting everything prepared for your mortgage application. It’s best to work hand-in-hand with your financing provider and real estate agent so that you can prep your home and payment options at the same time.

You don’t have to rush the process either. Repairs take time, and so does poor credit score rehabilitation. We are here to help you and give you the best advice regarding real estate transactions as you work on a loan application plan.

Find Your Dream Home with Marketplace Homes

As you can see, there are many loan options out there that have lower minimum credit score requirements. Contact Marketplace Homes today to connect with a real estate agent who can guide you through the process of getting ready for a home sale.