Can I Get a Mortgage with a Credit Score in the 500 Range?

Reader question: « I’ve been researching this question all over the Internet, and I’m more confused now than when I first began. My middle credit score is a little over 500. Is it possible to get a mortgage loan with a FICO score in this range? »

The FHA loan program might be your best (and only) option. The FHA’s minimum requirement for credit scores is 500. But you still have to be approved by a lender in the private sector, and most of them will not entertain a score that low.

Wells Fargo was in the news earlier this year for lowering their FHA credit requirements to 500, but I have yet to confirm this through the company. It was in the New York Times, though. So you can probably trust the source. Scroll to the bottom of this story and you’ll see the part about Wells Fargo, credit score of 500, etc. This lender has essentially lowered its FICO score requirements to match those set forth by the FHA.

But while you might qualify for an FHA mortgage loan with a credit score of 500, you’ll also face a larger down payment. Borrowers with good credit can qualify for the 3.5% down-payment program, which is what makes these loans so popular to begin with. But if your score is below 580, you’ll financing surgery with bad credit need to make a down payment of 10% or more.

Credit Score Misinformation

You said your Internet research made you even more confused. You’re not alone. We get a lot of emails from people who are confused about something they read on a blog or website. There are three reasons for your confusion:

A lot has changed in the lending industry over the last few years. During the housing boom, just about anyone could qualify for a mortgage loan. Bad credit score? No problem. We have a subprime loan that’s perfect for you. Can’t prove your income? That’s okay. We have a stated-income mortgage to get around that issue. Lenders were basically creating new mortgage products to qualify borrowers who should never have been approved.

But those days are over. Lenders today are requiring higher credit scores, proof of income, lower debt ratios, larger down payments. They are minimizing risk. And that’s what your credit score says about you — it tells them how risky you are, as a borrower.

The problem is that Internet content has not kept up with changes in the mortgage industry. So there’s a lot of outdated information online. The article might have been accurate five years ago, when the author wrote it. But not anymore.

You could be reading an article from 2002 without even realizing it. And back then, you actually could get a mortgage loan with a 500 credit score — or even lower.

Credit score requirements vary from lender to lender. Most of them adhere to the guidelines set forth by the FHA (for FHA home loans), or Fannie Mae and Freddie Mac (for conventional mortgages). These requirements trickled down to the primary mortgage market, where the loans are originated.

But lenders can also impose their own set of guidelines on top of those set by the FHA, Freddie Mac or Fannie Mae. When they do this with credit scores, it’s often referred to as an « overlay. » The FHA might require a credit score of 500 or above for their mortgage program. But the lenders can lay their own requirements on top of these guidelines — hence the term overlay.

That’s why some FHA-approved lenders will require a FICO score of 620 or higher, even though the actual program’s minimum is set at 500. At the same time you have a company like Wells Fargo, which has supposedly lowered its credit requirements to match the FHA’s criteria (see above for details). Therein lies the confusion.

Anyone can publish anything online. Aside from the major news websites, there is no editorial-review process for online content. And believe me, there’s a lot of bad mortgage advice out there. I refer to this as Internet vomit. Call it what you like, but it results in a lot of confusion among readers.

When you’re researching credit scores and other mortgage requirements, I encourage you to consider the source and the date. Get your information from reputable websites, and try to find articles that are current. This is the advantage of reading news stories over regular Internet articles — the news pieces almost always have a date at the top. Not to mention an editorial process.

My Advice: Boost Your 500 as Much as Possible

Even if you do get approved for a mortgage with a credit score of 500, you’re going to pay a much higher interest rate. This will result in a larger payment each month. How much larger? Let’s take a look.

I have a credit score of 500, but I’m still barely able to qualify for an FHA loan. Because of my low score, the lender charges me more interest on the loan. The average rate for a 30-year fixed mortgage is 4.85% when I apply for the loan. But the lender assigns an interest rate of 6% on my mortgage. So my monthly payments for a 30-year loan of $250,000 would be $1,498 (plus taxes and insurance). Over the 30-year term, I would pay about $289,595 in total interest charges.

I have an excellent credit score of 800. Because of this, I have no trouble getting approved for a mortgage loan. The lender is willing to offer me their best rates on the loan. I lock in a rate of 4.75% for a 30-year fixed mortgage. The loan amount is the same as it was in the first scenario, at $250,000. My monthly payment would be $1,304 (plus taxes and insurance). Total interest paid after 30 years would be $219,482.

In the second scenario, I was offered a lower rate as the result of having a higher credit score. So my monthly payment would be $194 less than in the first scenario. I would also pay $70,000 less in interest over the 30-year term (if I kept the loan for that long).

Other Mortgage Requirements

Keep in mind your credit score is only one of the checkpoints when applying for a loan. Mortgage lenders will also review your income, your debts, and other aspects of your financial situation. In most cases, you need to have a history of steady employment for at least two years. Your non-housing debt obligations (car payment, student loan, etc.) cannot eat up too much of your income.

Disclaimer: This article answers the question: Can I get a mortgage loan with a 500 credit score? The information presented above is for educational purposes only. The only way to find out for sure if you qualify for a home loan is to apply for one. There are exceptions to ever rule. A pre-qualification