Homeownership is still the American dream, but getting approved for a mortgage will largely depend on your credit score.
If you have poor credit, then your odds of qualifying for a home loan are significantly reduced.
However, you could qualify for a mortgage with a credit score as low as 580-600.
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FHA Home Loans
Before FHA loans were introduced, to get a mortgage, you needed to have a significant 20% down payment and excellent credit, however, that’s no longer the case.
The FHA does not issue loans; they insure the mortgage in case a borrower defaults on the loan. This dramatically reduces the mortgage lenders’ risk allowing them to loosen their qualifying requirements.
FHA loans have the lowest minimum credit score requirements of any mortgage programs around.
With a credit score as low as 500, you could qualify for an FHA loan with a 10% down payment. However, lenders set their own credit requirements, and finding a lender that can approve your mortgage with a credit score below 600 will be difficult.
What Your Credit Score Means
Your credit score is the likelihood you will pay back a loan: the higher your credit score, the better interest rates you will receive.
- Excellent credit = 720+
- Good credit = 680-619
- Average credit = 620-679
- Poor credit = 580-619
- Bad credit = 579 or lower
How Your Credit Score is Calculated
Payment History (35%) – Your payment history is the single biggest factor in determining your credit rating. This includes late payments and collection accounts. Making your payments on time is the best way to a good credit score.
Amounts Owed (30%) – The amount of available credit you’re using compared to your credit limit is called your credit utilization ratio. It accounts for 30% of your overall score. The lower your card balances, the higher your credit score will be.
Length of Credit (15%) – How long your credit accounts have been opened accounts for 15% of your score. The longer your accounts stay open, the better your score will be. This is why it is wise to keep your credit accounts open.
Types of Credit (10%) – 10% of your score is based on having multiple types of credit accounts open, such as credit cards, auto loans, mortgages, etc.
New Credit (10%) – Whenever you apply for a loan, there is a new inquiry into your credit history. These inquiries count against your score for up to 12 months.
Your Credit History is as Important as Your Credit Score
Lenders look at more than just your FICO score. They will take an in-depth look into your entire credit history, including your payment history.
If a borrower has several late payments in the past 12 months but has a 620 credit score, they are actually in a worse position to qualify than a borrower with a 600 credit score and no late payments in the past year.
Here are some compensating factors that will increase the likelihood you can get approved despite having bad credit.
- No late payments in the past 6-12 months
- Low debt-to-income ratio, high income
- Substantial down payment, low loan-to-value ratio
- Minimal debt in collections
8 Factors and Errors You Need to Fix on Your Credit Report
Check Your Credit for Free
Before you apply for a mortgage, you should pull a copy of your credit report and scores. You can do this for free using several different websites and apps. We recommend Credit Karma and Credit Sesame.
You can view your report and score completely free. If you notice any errors at all, it is best to dispute those accounts with the credit bureau before applying.
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Tips to Improve Your Score Before a Mortgage
If you have less than perfect credit, then you should do whatever you can to improve your score before applying for a home loan.
Pay Down Credit Card Debt
If you have high balances on your open credit cards, then your credit rating is suffering. We recommend paying down your card balances to less than 20% of the credit limit to maximize your score.
Do Not Apply for New Credit
If you’re planning on getting a mortgage loan in the near future, you should hold off on applying for new loans or credit cards. New loan account and credit inquiries will lower your credit score, making it more challenging to get approved.
First-Time Home Buyers
If you’re a first-time home buyer, then there are many benefits to using an FHA loan. There are many first-time homebuyer down payment assistance programs and grants available.
An FHA mortgage also requires just a 3.5% down payment, which is much lower than the 5%-20% down needed for a conventional loan.
VA Home Loans
If you’re a Veteran, you may qualify for a VA loan. VA loans come with no down payment or mortgage insurance requirements. Minimum credit score requirements for VA mortgages vary lender to lender.
Can I get a mortgage with a 600 credit score?
Yes. FHA loans are available to borrowers with a credit score of 580 or higher. If you have a 600 credit score, you should be in an excellent position to qualify.
How much money do I need does with bad credit?
The lowest credit score accepted by FHA is 500, with a 10% down payment. However, lenders set their credit requirements, and many lenders will not approve borrowers with a score below 600.
Getting a mortgage with a 600 credit score is not easy, but it is possible, FHA loans are perfect for borrowers with poor credit.
Do you best to improve your scores before you apply for a mortgage?
Making sure your credit profile is clean with no late payments or collections in the past year. This will significantly improve your chances of being approved.
Are you ready to get a mortgage?
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