So you’ve been saving all your life, putting away all of your extra money, and cutting down on the caffeine that’s been slowly burning a hole in your wallet. Now, you think you’re ready to buy a house. One that you can say you own!
But, let’s face it, even if you’ve raised an incredible sum by now, it would feel terrifying to put all of your liquid assets in one basket. But, even if it’s for a house, you need. So, for most people, it will make a lot more sense to get a mortgage.
The problem is, the home loan process is not exactly something you learn at school. Typically, there are two roads you can choose from. You can either do all your research on your own, just as you are doing right now, or you can ask the help of a mortgage broker who’ll do all of the work for you. It will depend on what you’ll think is better for your situation.
So, this article is for you, especially if you have a 600 credit score. We’re going to answer all of those questions you haven’t even voiced out yet for a smoother and less stressful mortgage journey. Hop on!
Table of Contents
Buying a House
There can be two kinds of potential borrowers. There’s that person who finds a house, falls in love with it, decides to buy it, and then applies for a mortgage. On the other hand, there’s someone who chooses to get a pre-approval, shops around for a home according to a budget, and then buys the house through a mortgage.
If you’re the former, it’s okay! It’s no reason to panic. Getting pre-approved for a mortgage is usually just a way to set your expectations so that you can be more realistic before you even walk into open houses. You don’t want to find yourself in a situation where you’re dead set on the house just to be informed it’s absolutely over your budget. Especially with today’s rising home prices!
Here are some of the benefits of getting a mortgage pre-approval.
- You’ll get an exact figure of the amount the mortgage lender is willing to let you borrow. This means avoiding getting heartbroken when you find a house that’s too expensive for you.
- You can think of it as practice for the actual application, and you’ll find out whether you do qualify for a mortgage. It’s like getting your feet wet first before jumping straight into the pool. You’ll get a taste of all the work you need to do and all the paperwork you need to prepare. In case you weren’t considering mortgage brokers before, at this point, you might start weighing the costs of the legwork.
- You’ll find out whether you need to increase your credit score in case you want a bigger budget for the house you’re buying or you want better features for the mortgage you’ll get. If you do find out that you need to improve your credit score, this can work to your advantage because improving your credit means getting better mortgage rates.
Applying for a Mortgage
If you do already know which house you want to buy, that’s already half of your troubles! Now, you need to find out what type of loan you can get based on your circumstances.
Before getting into all these different loan types, you have to know just what you miss out on due to your credit score.
Strictly speaking, a 600 credit score is not a low credit score. So if we want to worry you at this point, we’ll advise you to come back in a few months once you have a higher FICO Score. That said, some people would think of 600 as a bad credit score, but that’s more of the technical definition because FICO says that Good scores start at 670.
There are still lots of loan types available for a credit score of 600. However, if you want to get a seat at the table so you can talk to a bigger pool of mortgage lenders, a credit score of 620 or higher can take you there. And this kind of score is not that far away!
Mostly, what you won’t be able to apply for are what’s called conventional loans. This is the more traditional loan type where a private institution lends you money. Since the government does not back it, investors will want to take the lesser risk by approving only borrowers with higher credit.
To qualify for this type of loan, you usually need to have a credit score of 640 or better. Truthfully, though, there aren’t many conventional loan lenders who approve at 640 with only a few conditions.
Home Loans for 600 Credit Score
So, what loans are available to borrowers who have a credit score starting at 600?
The answer: Government-backed loans
If conventional loans are cats, then government-backed loans are dogs. But, of course, they’re entirely different kinds of pets! But just as with dogs, where there are Siberian huskies, chihuahuas, or poodles, there are all different kinds of government-backed loans. These all have their features, own credit score requirements (or lack of), and other conditions.
Let’s discuss each of them based on what makes them unique.
If you’re buying rural real estate
Now, when we say rural, you might logically imagine the far outskirts of a city, the middle-of-nowhere, or a farmhouse. But when we say rural, for this situation, it’s just based on how the U.S. Department of Agriculture defines locations. You might be surprised, but it will be best if you find out yourself by visiting this page and entering your details.
The USDA ensures a loan type to encourage more people to support smaller economies instead of flocking to the big cities. You’ll hear about all the major types of mortgages; this is the only one that doesn’t define a particular minimum credit score. So you can qualify for a USDA loan whether you have a 500 credit score or a 600 credit score…as long as their definition of rural land covers the house you’re buying.
As an incentive for borrowers who will choose this mortgage type, you don’t need to make a down payment when you get a USDA loan. Although there isn’t exactly any mortgage insurance you have to think about, there is a guarantee fee that you have to pay based on the kind of USDA loan you will be approved.
If you’re on active duty or a veteran
Another zero-down payment government mortgage you should consider getting if you have a military background is what’s called the VA loan. So again, if you are a service member or have served, this is the only mortgage loan you should consider. We’re not kidding!
That’s because aside from not having to make a down payment, there’s also no mortgage insurance, just a very minimal funding fee. And you can shop for your house from any location in the country you want!
This mortgage backed by the Department of Veterans Affairs has only become more popular since the Blue Water Navy Vietnam Veterans Act of 2019 took effect in 2020, effectively removing the previous loan limits. So, this time around, veterans can choose to move into bigger houses anywhere they want. (Just as long as they can afford the monthly payments, of course!)
If you are none of the above
Finally, we have come to the primary type of government-backed loan that’s open for nearly everybody. Seriously!
According to Experian, a tiny 1% of potential borrowers have a credit score that’s lower than 500, which is in the Poor range of FICO Scores. This means that 99% of prospective mortgage borrowers can be eligible for a Federal Housing Administration (FHA) loan.
FHA loans are often called first-time homebuyers’ mortgages because they’re truly meant to exist for those people with zero experience in borrowing. But it doesn’t have to be your first time to qualify for an FHA loan. The only requirement is that you meet the minimum credit score of 500.
If you have a 500 credit score, you can borrow up to 90% of your home’s purchase price. If your score starts at 580, you can borrow up to 96.5 percent!
Understanding Your Options
Now that you know the three main loan options you can choose from, you can then look for a lender that offers the particular type of loan you need.
Along the way, you might encounter a mortgage lender who might still not approve you because you don’t meet their own minimum credit score requirement. Don’t be confused! Although loan types prescribe their own minimum credit score requirements (or lack of), this doesn’t mean that all mortgage lenders follow this. Instead, they usually have what are called overlays or their credit requirements. After all, it is their money you’ll be borrowing, so they’ll have the final say. But if you don’t qualify for a loan at one lender, you can always turn around and try their competitor!
For example, although borrowers with credit scores of 500 should get approved for an FHA loan, in reality, many lenders want to see at least 580 in your credit report. It’s normal to experience rejection, though, as you go through this journey. After all, you’ve decided to get a mortgage! You’re not just borrowing a 50 from your next-door neighbor.
FHA Loan vs. Conventional Loan
Before letting you go, we also want to discuss the essential difference between FHA and conventional loans.
We’re pitting these two against each other for two reasons. Firstly, they require you to make a down payment. Secondly, with an FHA loan or a conventional loan, you can buy a house anywhere in the U.S. and no matter what professional background you’ve had.
Since these are the two types of loans that many people eventually have to choose between, the question comes down to what makes conventional loans more attractive than FHA loans.
The answer: mortgage insurance. It’s that additional fee that doesn’t serve you at all and doesn’t go toward your home equity.
For FHA loans, they call it a mortgage insurance premium. For conventional loans, they call it private mortgage insurance. At the end of the day, though, they function in basically the same way no matter what they call it. They protect the lender in case you default on your mortgage.
What makes FHA loans a lot less enticing, even though both options require insurance, is that with FHA, you have to pay the premiums for the whole life of the loan. Just imagine how much that amount can total after 20 or 30 years! There’s no way of stopping it unless you eventually decide to refinance, and that’s going to be quite a hassle since it means getting another mortgage altogether and paying another set of closing costs!
For a conventional loan, there’s a way to avoid private mortgage insurance. That is if you can afford to pay at least 20% down on your loan. If you can’t, though, you need to wait until you reach at least 22% home equity, and this charge will just automatically stop showing up in your monthly statements.
When you think about it, borrowers with credit scores below the Good FICO Score range who aren’t buying rural or veterans are left with only one road to take, which is not a choice! So, if you’re going for an FHA loan, it’s essential to be aware of this difference. Then, suppose eventually you check your credit and find out that you can start applying for a conventional mortgage. In that case, you can compute the refinancing costs versus the cost of paying the rest of your FHA insurance premiums. It’s the kind of math you really have to do if you want to be able to save some money!