The Federal Housing Administration (FHA) loan is often referred to as a first-time homebuyers' loan,…
You need a credit score of 620 if you want to get approved for conventional loans. If you have a credit score of 600, this makes you ineligible for these traditional mortgages. What are home loan options there indeed for a 600 credit score? What are your chances, and who should you be speaking to? If they can’t qualify for conventional loans, what can borrowers with credit scores of 600 or lower improve their chances?
These are all normal questions to ask once you decide that you need to buy a house and that you want to do so through a mortgage. But, especially in the tough real estate market, we are in at the moment, and you might want to make sure you’ll be able to qualify for a home loan and do so as soon as possible.
Thankfully, you do have a good chance of getting approved for a loan. And with a 600 credit score, you only need a few more points to open yourself up to even more options.
In this article, we’ll be exploring scenarios you can choose, so you can get the mortgage that’s best for you.
Table of Contents
All About Credit Scores
Before we start talking about options, however, it’s important to know where exactly you stand on the scale, credit-wise.
The FICO Score is the most commonly used credit scoring system by the major bureaus, so this is what we’ll be referring to here. According to FICO, the ranges are:
- 300 to 579 – Poor
- 580 to 669 – Fair
- 670 to 739 – Good
- 740 to 799 – Very Good
- 800 to 850 – Exceptional
As you can see, aside from disqualifying you from conventional loans, a 600 FICO Score really only falls in the Fair range, i.e., it is actually considered bad credit, as far as lenders are concerned. So to get it up to the Good range, you’ll have to earn at least 70 more points. The good news is, though, 70 points is actually achievable in a few months.
A higher FICO score can mean a higher loan amount, a more competitive interest rate, and possibly a more comfortable down payment amount when you’re applying for a mortgage. It can also make up for other factors mortgage lenders consider that you might fall short of, like debt-to-income ratio, job history, and assets.
At the end of the day, however, credit scores are mostly used by lenders to evaluate your credit risk. Once you get through this door, you really have to worry about coming up with the money for succeeding payments. The lower your credit score, the fewer home loan options you can get. Still, there’s no need to worry. Once you actually get a mortgage and start consistently making good payments, this will actually help your credit score grow. In a few years, you might even be able to get it up to the Very Good range, in which case, you can see if you can get a refinance so you can get a cheaper mortgage overall.
600 Credit Score Home Loans
A 600 credit score is not a bad credit score to have. Of course, you might only have it because you’ve stumbled on a few payments, or maybe you’re just fresh out of university and at your new job. But there are indeed just a few loan options you can get with this kind of credit score that may not serve you and other types of mortgages. Our suggestion? You familiarize yourself first with these types of loans and work on improving your credit. Who knows? Maybe this time next year, you’ll even have exceptional credit, and you’ll have your pick of whatever mortgage you will want to get.
When it comes to mortgages, some are government-backed and others that private institutions guarantee. For the fundamental type of government-backed loan, we have the Federal Housing Administration loan.
To qualify for an FHA loan, you need to have a minimum credit score of 500. It doesn’t matter where you’ll be buying your home, as long as it will become your primary residence.
If your credit score is 500 to 579, you’ll be allowed to deposit a 10% down payment. On the other hand, if your credit score is 580 or higher, you can make as low a down payment as 3.5 percent, with the caveat that the lower down payment you make, the higher interest you’ll get.
FHA loans are meant for first-time homebuyers, but you don’t necessarily have to be one to get approved. But if it will indeed be your first time, you can also seek help from first-time homebuyers assistance programs as well as down payment assistance programs. The FHA loan program is not strict when it comes to down payments. If you qualify for a grant, you can use this to make your minimum down payment, so you won’t have to take it out of your savings.
Due to all these benefits, the FHA loan is a staple mortgage that many people continue to apply for. However, it does have its own drawback that you need to understand.
With an FHA loan, many people can consider the obligatory mortgage insurance as a big disadvantage because no matter how much you’ve already paid down on your home loan, it just does not go away. This is compared to the private mortgage insurance you have to pay for on a conventional loan which you can even skip if you can make a 20% down payment. On the upside, the logical thing to do once you’ve been paying your FHA loan for a while is to get a refinance especially if there’s a better interest rate. After an FHA loan, you might already qualify for conventional loans, and in which case, you might not have to worry about mortgage insurance.
If you are planning to buy a house in the countryside, which many people have been doing due to the COVID-19 pandemic, we have good news for you! You can check on this property eligibility map to see if you might qualify for a USDA loan.
The U.S. Department of Agriculture insures this mortgage loan, and it seeks to populate and develop the more rural areas of the country. Strictly speaking, this is a residential loan, and you have to make sure that you’ll be using the house as your primary residence. You can’t use it for business or commercial purposes because the government does not want people to benefit from the zero-down payment benefit. That’s right!
Aside from not having to make a down payment, another great thing about USDA loans is they don’t actually have minimum credit score requirements. You can still get rejected due to other factors in your application, but your credit score will not really be the problem. When you have a 640 credit score or higher, you might experience a faster application process because of automated underwriting. Since you have a 600 credit score, though, you will want to prepare as much documentation about your debt and finances for the required manual underwriting. Remember, 600 is still considered bad credit, and they want to understand the contributing factors that gave you this lower credit score.
What does matter a lot to USDA loans is your debt-to-income (DTI) ratio. The lower your DTI ratio, the better. This means that you’re making a lot more money than what’s going toward your monthly expenses. Generally speaking, a good DTI ratio is not just good for you because it will qualify you for this loan; it will also show that you’re doing great financially. That’s why you can handle this further expense. However, in case you do have a higher DTI ratio in addition to your bad credit, it really may not yet be the best time for you to buy a house.
What to Do with a 600 Credit Score
Since you’re already doing this research, this probably means that you are really at that point of making a house purchase decision. If you have no other choice, you’ll really have to make do with either an FHA loan or a USDA loan. So it now comes down to whether you will be buying real estate in a rural area and if you can make any down payment.
Whatever your circumstances, it will be very beneficial for you at this time to seek the help of a mortgage advisor. This financial expert will talk you through the whole process and do most of the leg work for you. Right there, this can already mean an enormous amount of savings. In addition, mortgage advisors will already be in the real estate and mortgage industry networks, so they’ll have contacts for everything you’ll need especially when it comes down to looking for a good mortgage lender.
The better scenario would be if you can choose to wait.
At the moment, the real estate market is still pretty hot, and prices keep going up. So if you’re stuck on choosing between an FHA loan and a USDA loan, this will mean a costly mortgage this 2021.
If you can delay your home purchase, you can wait until home prices start normalizing again, as well as until your credit score gets up to the Good FICO Score range. What we would recommend you get is a conventional loan, which is your standard Fannie Mae and Freddie Mac loan. With conventional loans, you might be able to avail yourself of more space as well as a better interest rate compared to an FHA or USDA loan. Remember, this will only be the best bet for you if you can afford a 20% down payment, so wait out for that market to cool and save enough for your dream home. It’s really almost within your reach at this point!