Whatever your got-to home buying strategy is—a cash buyer or home loan diva—we've put together…
Whenever you think about mortgages, you probably imagine that you need a seriously exceptional credit score to get approved. After all, you take on a mortgage to fund a home purchase, which can cost quite a fortune. This is why a lot of people work to get the highest FICO score they can get.
The thing is, you don’t actually need to get to the exceptional level to get approved. But when people find out that they have a low credit score, they tend to shelve their plans for a while until such a time when they can get it to a better level. And depending on your circumstances, this might be the best thing to do.
However, your credit score is just one of the hoops you need to get through to qualify for a home loan. Mortgage lenders will also want to know about your debt-to-income ratio, and based on the type of loan you will avail of, they’ll also want to know how much down payment you can make.
With a 580 credit score, there are a few good loan options that you can choose from. Today, let’s find out what these options are as well as the key steps you need to take to insure a home loan approval.
Table of Contents
580 Credit Score Home Loan Options
With a 580 credit score, chances are, you might be a first-time homebuyer. The good news is that there is a mortgage-backed by the Federal Housing Administration that keeps options available for first-time homebuyers like you.
To qualify for an FHA loan, you don’t have to be a first-time home buyer, but you must satisfy the minimum credit score requirement of 500. With a credit score falling from 500 to 579, you can be allowed to close your loan with a 10% down payment based on your home’s purchase price. Since the FHA allows borrowers to get this 10% funding from other sources (apart from income and savings), you can also look to down payment assistance programs if you need further help to buy a house.
Now, if you have a FICO score of 580 or higher, the FHA allows as little as a 3.5% down payment, but remember, this will mean a higher interest charge over the life of your loan.
With an FHA loan, you are allowed to buy your house anywhere you want in the country as long as this will become your primary residence. So it’s a very reasonable deal for first-time homebuyers who make low to moderate incomes.
On the downside, however, FHA loans require borrowers to pay for mortgage insurance that doesn’t fall off no matter how long you pay your loan. Compared to traditional mortgages, where they stop charging insurance once you reach a certain threshold, FHA loan mortgage insurance pretty much stays. This is a fee that protects the lender on the off chance that you default, and payments for these do not count towards home equity. To convenient as an FHA loan may sound, you might really want to think hard before you apply.
The strategy of some FHA loan borrowers is to pay off their mortgage for a couple of years and then refinance when a better interest rate is available. With on-time and complete payments, you can expect a much higher credit score which will allow you to qualify for a better type of mortgage.
The U.S. Department of Agriculture is not just responsible for ensuring food safety in the country. They also aim to develop rural communities, and it is with this goal in mind, they guarantee the USDA loan program.
In case you are intimidated, though, there’s no particular profession required for you to avail of a USDA loan. What’s even more surprising is, there are no minimum credit score requirements. It’s true!
To qualify for a USDA loan, you have to buy a house in a rural area and make sure that you’ll actually live in it, as in an FHA loan. To be clear, this is for a residential loan, so if you’re buying with the intent of using the land for business, this type of loan is not applicable.
Although there is no minimum credit score needed to apply for a USDA loan, you will have a slightly better edge in your application should you have a 640 credit score or higher. This is because, with a 640 credit score, underwriting can be automated so that it can be done much faster. On the other hand, underwriting will have to be manual if your credit score is 639 or lower, so they’ll be asking for more papers and documentation to really see into your financial and credit history.
Furthermore, with a USDA loan, you are not required to make a down payment. Remember, though, that the higher the loan amount you get, the higher interest you’ll have to pay for over the life of the loan. Therefore, we recommend that if you can afford to make any down payment, you already pay whatever you can so you can build equity much faster.
How to Get a Mortgage
And that’s basically it!
Technically, a 580 credit score is very much within the bad credit score range. At this level, if you can afford to wait even just a few months, it is better to work on improving your credit first instead of submitting applications to different lenders. Remember, every time someone does a credit check on you or what’s called a hard inquiry, your score slips just a few more points lower.
If you cannot buy any more time and you really need that house soon, there are two ways to get a mortgage we can recommend.
1 – Try Rocket Mortgage by Quicken Loans
Quicken Loans is the largest retail lender in the country, and Rocket Mortgage is their online arm where you can easily apply electronically.
There’s a reason they’ve gotten to be the biggest in the industry. Way back when Quicken Loans launched Rocket Mortgage, they initially promised an 8-minute turnaround time to find out if you’ve been approved for a loan. Of course, over the years, they’ve dialed down on this assurance, but you can definitely still get your result much faster, all things considered.
Important note: as of 2020, Quicken Loans no longer accepts applications for USDA loans, so you can only get an FHA loan.
2 – Talk to a mortgage broker
Another good option to think about is to look for a mortgage broker you can trust.
As we’ve previously mentioned, every time you apply for a loan, your credit score takes a hit. The advantage of hiring a mortgage broker is that they’re already connected to most people in the industry, so with one look at your file, they might already know the best lender you can apply for.
Take note that mortgage brokers earn via commission paid by either the borrower or the lender at closing. On the upside, this incentivizes your broker to find you a mortgage lender who has a higher chance of approving your loan. Thus, with the help of a mortgage broker, you can save both time and money during the very search for the home loan you need.
If you do have some time on your hands, the best thing to do is to improve your profile so that it can become easier to qualify for other types of loans.
Just for reference, you need a FICO score of at least 620 to get approved for conventional loans. These are your Fannie Mae and Freddie Mac loans, allowing you to borrow more money on better interest rates depending on how high your credit score is.
1 – On Credit Score
Due to the weight of credit scores on mortgages, it will be most beneficial if you can increase your credit score by at least a hundred points. This can be done by observing the following:
- Paying your bills in full and on time
- Checking your credit report for errors
- Removing unhelpful line items in your credit report
You might find that although some of the information in your credit history pulling down your score is true, it might not be 100% factual. On occasion, people can still find old loans they’ve already paid off, showing a balance in their credit report. When this is the case, you have to do your best to have them corrected as soon as possible so that your report can be updated by the time it needs to be reviewed by mortgage lenders.
2 – On Debt-to-Income
Another important factor that lenders critically look at in your report is your debt-to-income ratio. This is the amount of money you owe versus the amount of money you make. Basically, they will want to know if your salary is already spread too thin across several other debts.
You can work on this in two ways:
- Pay down your debt. Without sacrificing essential funds, see how much debt you can take off your account. This will also help you to save more money by avoiding paying interest on these other debts.
- Look for other income streams. The more money you make, the more debt you can finish paying off. You’ll also be able to save additional funds for the down payment you’ll be putting on your new home.
3 – Down Payment
What we’re basically targeting is a loan type that will ask for a down payment. A USDA loan may seem tempting in the short term, but you’ll thank yourself later once you realize how much money you’ll save through a conventional loan.
And since we’re already recommending you get a conventional loan, the down payment amount to target with a conventional loan is 20 percent. So unlike FHA loans, where you have no option but to pay for mortgage insurance, you can skip insurance altogether if you can pay 20% upfront with conventional loans.
Remember, as long as you cannot prepare a 20% down payment for a home purchase, you may not truly be ready yet to buy a home and much less apply for a mortgage. The lesser you pay for a down payment, the more you’ll have to pay for in interest. Even if you can qualify for an FHA loan or a USDA loan at this point, you will not be doing yourself any favors.
It’s not an easy time to be on the market for a new home this 2021. More people are willing to pay much higher than sellers’ asking price to compete with other home buyers. Our suggestion is to wait it out until home prices start settling down again.
If you are on the market, though, because you don’t have any other choice, there are definitely options you can look into with a 580 credit score. Depending on the down payment amount you are willing to make, you can either pay none through a USDA loan or pay your choice between 3.5% or 10% through an FHA loan. Whichever of these options you choose, remember that the lower down payment you make, the more expensive the loan.
We hope you enjoy your mortgage journey. You are in for quite a ride!