The Federal Housing Administration (FHA) loan is often referred to as a first-time homebuyers' loan,…
Are you feeling nervous after seeing your credit report? Don’t worry. It’s normal to get the jitters, especially when you’re applying for something.
The minimum credit score required to get the primary type of home loan may surprise some people, but it is just 500. And this is not one of those subprime loan deals with astronomical interest rates. Instead, the federal government ensures that options are available for almost all Americans who hope to secure their dream houses.
If you have a 600 credit score and you are aiming to buy a house through a mortgage, this article might have the answer to some of your most burning questions. Here, we’ll give you a heads up on what to expect of your loan application, as well as what your choices might look like in this pandemic era.
You’ll be benefiting from the experience of millions of home buyers who’ve treaded these waters!
The COVID Effect
The COVID-19 pandemic has brought us into one of the most uncertain periods in living memory.
At the beginning of the pandemic, lenders who commonly would have accepted borrowers with borderline credit started to balk and backtrack, updating their list of requirements sometimes multiple times a week. To boost homebuying, the Federal Reserve has also cut interest rates, pulling them down to historic lows, but this couldn’t make up that there were not enough homes in the market for the number of buyers who are now raring to close on a deal.
Due to several lockdowns imposed worldwide, there are also not enough raw materials to continue building houses, a particular effect that’s expected to keep dampening the market until at least 2022.
Today, aside from preparing a down payment, it would also be wise to prepare funds to make arrangements with home sellers. The competition has further created a bidding war amongst home buyers set on getting particular houses.
On the mortgage end, lenders are now keen to doublecheck employment and verify salaries, wary of the effects of the pandemic on specific industries. It is generally more beneficial for your application if you present at least two years of stable employment. A strong credit score might not be enough to convince some mortgage lenders to approve your loan.
If you’re hoping to buy a house before the end of 2021, we recommend that you see about getting a mortgage pre-approval first, so you can get an idea of where you stand, what budget to refer to, and other requirements you may have missed. Pandemic or not, the mortgage application is a complex process, so it’s better to get your ducks in a row before you wade in!
Home Loan 600 Credit Score Options
When you have a 600 credit score, there is one common type of mortgage loan you won’t qualify for until you reach a minimum credit score of 620. These are conventional loans that are borrowed from private lenders and have stricter requirements for borrowers.
As credit scores go, 600 technically falls under bad credit since good FICO Scores start at 670. However, combined with a satisfactory statement of assets and a low debt-to-income ratio, you still stand to have a strong chance of qualifying for the mortgages we’ll list down below.
Minimum credit score: 500
The Federal Housing Administration backs loans primarily meant for first-time homebuyers, although any American who has a credit score of at least 500 is welcome to apply.
Since borrowers with 500 credit scores are considered lower credit applicants, they are usually rejected for conventional loans, and FHA loans give them the chance to get a shot at buying houses despite these circumstances.
There is a catch, though. If your credit score is somewhere from 500 to 579, you will have to make a down payment of at least 10 percent. Since you have a credit score of 600, you will be allowed to make a smaller 3.5% down payment. While it sounds like a benefit of having a higher credit score, be informed that if you make a down payment of less than 10% on an FHA loan, the unavoidable mortgage insurance stays for the life of the loan. No matter how much home equity you gain. Borrowers with 500 credits who put down 10 percent may even get their loans a lot cheaper because their mortgage insurance falls off after eleven years.
If a 10% down payment is way out of your reach at the moment, you should know that the FHA allows borrowers to get help from family or friends who are willing to pledge gifted funds, as long as they sign documentation confirming they will not seek compensation. There are also down payment assistance programs depending on your state that specifically aid FHA loan borrowers.
Of all the options we’ll mention in this article, FHA loans historically come out to be the most expensive. In particular, if you are down on your luck and have no option but to pay less than 10% on your loan, it would be worthwhile to keep on the lookout for better rates and mortgages while you are paying down your FHA loan. In addition, if the costs for a refinance are worth it, it would be better to get another home loan later on, so you can skip paying for mortgage insurance.
On the bright side, with a 600 rating, you are only a few points away from qualifying for a conventional loan. After a year or two of paying your FHA, you might already be eligible for a traditional refinance.
Minimum credit score: None
The U.S. Department of Agriculture insures the youngest type of mortgage on our list. More commonly referred to as a rural housing loan, the USDA loan is a residential loan specifically for houses that satisfy the USDA’s eligibility rules for rural locations.
The USDA technically does not define a minimum credit score requirement for this mortgage. So, unfortunately, it’s still up to the mortgage lender whether they’ll accept a 600-credit-score applicant. For the USDA, a 600 credit score poses no issue as long as you can supply documentation of your recent financial history, specifically for the causes of the negative items in your credit report.
One of the aims of this type of loan is to give chances to deserving Americans, which is why the USDA mortgage is notorious for its stringent qualifications, like its strict household income limit that varies per state. Aside from the individual income of the candidate, the whole household’s income is taken into consideration for the loan application.
It is well worth the effort to qualify for a USDA mortgage, especially if you push yourself to buy rural to avail it. The USDA loan is a zero-down payment mortgage, so you can keep your savings for a rainy day and only worry about the closing costs.
Minimum credit score: None
It may be hard to qualify for a USDA loan, but more people may be eligible for it than a VA loan.
The Department of Veterans Affairs also commits to helping active-duty members and veterans purchase houses easier under the VA loan program. But, unfortunately, you do have to satisfy this professional history to become eligible.
Today, VA loans are the most sought-after mortgages after the passing of the Blue Water Navy Vietnam Veterans Act of 2019 that effectively makes it possible for qualified borrowers to buy more expensive houses with zero down payment.
Historically, mortgage lenders are more confident in lending for VA loans because the VA insures 25% of the mortgage in case of a default. Effectively, even if the borrower makes no down payment, there is already 25% home equity, so mortgage insurance is not required. Instead, VA loan borrowers must pay a minimal VA funding fee at closing to ensure that the program continues for other beneficiaries. Depending on your entitlement, you may not even need to pay this VA funding fee.
The VA loan also enjoys the best mortgage rates in the industry and the most lenience as far as requirements go. However, as mentioned, it may be more complicated to apply for mortgages now than before the pandemic, so just be warned that there will still be lenders who will not approve for VA, even if you have a credit score of 600.
Choosing A Loan
Now that you are aware of your choices for financing, we hope that you now have a better idea of where to go for your loan application. If you have a military background, there’s no better option than a VA loan.
If you come from a different profession and need a zero-down payment deal, you can opt for a house in a USDA-eligible location. But, according to the state, this comes with the provision that your total household income does not go over the maximum limit.
On the other hand, if you are already set on a particular house, and it is in a more densely populated area, you can still go for an FHA loan. Remember that we recommend putting down at least 10 percent as a down payment as much as possible.
It’s easier to find a house once you have these parameters and a target for the type of mortgage you’ll avail. But what if you already have a place in mind and your credit history does not satisfy mortgage lenders at this point? It is a very likely scenario. In this case, we suggest getting the help of a mortgage broker.
It can be taxing searching for the best mortgage lenders on your own because every time you speak to one, your credit score can lose a few points. With the aid of a mortgage broker, your credit score will take a hit only once because your mortgage broker will already have contacts with many lenders. With one look at your profile, they might already know which mortgage lender is the best fit for you. They’ll be able to shop around for home loans on your behalf after hearing your preferences and goals.
The bottom line is it will be best to improve on your FICO Score before looking around for lending services. A higher credit score can mean a higher loan amount, and you will be able to qualify for a mortgage with cheaper costs.
Ask yourself these questions to find out if you can boost your credit score before you need to close on a loan:
- Do I have funds to pay toward existing debts? If you have personal loans or credit card debt, it will be better to pay off as much as possible before applying for your mortgage.
- Are there monthly payments I may have missed recently? A big part of your credit score relies on payment history. The longer it has been since your last late payment, the better it is for you. You need to make sure you don’t miss any more monthly payments moving forward to get back the points taken off your score.
- Have I checked every line on my credit report? Unfortunately, even the three major credit bureaus are not immune to committing errors. So be aware that it is possible to find inaccuracies in your credit report. It can be something as minor as a misspelling of your name, but if it is a detail that pulls down your credit score, you have to report it. As soon as you spot any, please do your best to have them removed by disputing them.
- Do I know someone with an exceptional FICO Score? Lastly, one of the easiest ways to increase your credit score is to become an authorized user on someone’s credit card, provided this person has a glowing credit history. You won’t even have to use their credit card or owe them any money. As long as you are someone’s authorized user, the positive items on their credit history will start showing up on your report, improving your FICO Score without costing you or your friend.