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Mortgage applications are often more complex than your average loan application process, and with good reason. There are thousands of options that can be found depending on where you are, and each one has its unique list of requirements. For the same reason, however, Americans today can enjoy the opportunity of applying for a home loan, no matter what their credit scores can be.
As with any financial transaction, though, the devil is in the details.
Every single mortgage loan you can find on the market asks for a minimum credit score requirement. Regardless if you are applying for a government-insured loan and the agency does not set a minimum credit score, mortgage lenders will still define their own. After all, backed by the government or not, you will be borrowing money from a private lender.
So if you want to buy a house but don’t have enough funds, you need to know if you meet the minimum credit score for mortgages.
Let’s find out what kind of home loan you can get if you have a 575 credit score.
Bad Credit Scores: What Are They?
The lowest FICO score you can get is 300. While getting this kind of FICO Score is next to impossible, getting a bad credit score is not that hard to accomplish.
Yes, bad credit scores do exist. However, it’s not just a label for a generally assumed low credit score.
According to the FICO credit scoring model, FICO Scores that fall under 670 are bad credit scores. But there are nuances. Scores from 580 to 669 are considered Fair, while scores from 300 to 579 are deemed Poor.
It can be very disappointing to find out that you have a Poor FICO Score. But, honestly, if this is a valid score and there are no issues with your credit report, you will most likely be aware of the underlying reasons.
Likely causes of a Poor FICO Score
- Bankruptcy is a derogatory item that stays on your credit report for up to seven years. Sadly, past the seven years, it can still be tough to remove from your record.
- Your payment history has enormous weight on your credit score. But there can be a big difference between a late payment you made a year ago and a late payment you made in the last two months. Even if the more recent late payment is for a negligible sum, this will deduct more points from your FICO Score than a late payment for a significant amount you made last year.
- Something you also have to be aware of is your credit utilization ratio. If you have a credit card, you will most likely know what your credit limit is. Your credit utilization ratio is the percentage of the limit you have already used. If you keep maxing out your limits, you will get a low credit score. The ideal amount of credit you should be using every month is somewhere below 30 percent.
- You might also be submitting credit applications too often. Whether you are applying for credit cards or personal loans, the frequency matters, especially if you keep getting rejected. Each new application deducts points from your credit score. If you have a lot of applications, this warns the lender that you are accumulating a tremendous amount of risk. As much as possible, keep your applications way apart regardless of whether you get approved or not.
575 Credit Score Home Loan Options
Now that we have presented to you the most probable reasons for your Poor credit score, we’re going to give it to you straight. You can apply for a home loan with a credit score of 575—unfortunately, it can be more complicated than usual to do so in 2021.
The economy is still reeling from the effects of the COVID-19 pandemic. As a result, lenders have raised minimum credit score requirements, and it is harder to qualify for government-backed loans, no matter how lenient they are supposed to be.
With your credit score, pandemic or not, you won’t qualify for any traditional loans. There are government-insured mortgages that might accommodate you, but there will be fewer lenders who can offer you these options.
Later, we’re going to give you advice on what to do in your situation. But before that, let’s find out what kind of mortgage you can apply for with a 575 credit score.
The primary option for most Americans, especially first-time homebuyers, is an FHA loan. This is a mortgage insured by the Federal Housing Administration (FHA) under the Department of Housing and Urban Development.
Whether buying a home in the suburbs or more rural areas, you can apply for an FHA loan as long as you have a minimum credit score of 500. This requirement is not hard to achieve because 99% of consumers have a FICO Score of at least 500. That’s why FHA loans serve as a firm option to rely on for borrowers with lower credit scores.
On Mortgage Insurance
It follows that if you have a higher credit score, an FHA loan would be your last option. FHA loans can get very expensive compared to traditional loans.
The minimum down payment for an FHA loan is 10 percent if your credit score is less than 580. For some types of loans, if you can pay at least a 20% down payment, you don’t have to pay for private mortgage insurance (PMI). FHA loans don’t have PMI, but they charge two kinds of mortgage insurance: upfront and monthly.
The upfront mortgage insurance is a premium you have to pay at closing no matter how much down payment you make. On the other hand, the monthly mortgage insurance stops when you reach 11 years on your FHA loan.
If you have a higher credit score, you can qualify for other types of mortgages that might not require you to pay for this kind of insurance.
On Down Payment
Since you have a lower credit score, there’s a very good chance you may be behind on some bills, if not struggling. If you don’t have enough savings to make the 10% down payment for an FHA loan, we want you to know that you can get help from people or organizations to come up with the money you need.
The FHA works with local down payment assistance programs that can provide grants for an FHA loan. Note that getting this kind of assistance means getting another loan entirely, and some programs charge interest rates a lot higher than mortgages offer. It will be like getting two loans to buy a house, so you’re starting with zero equity.
Another thing to consider about borrowing from down payment assistance programs is how long it is to get approved for one. Should you be lucky to find a program in your area, you still have to deal with explaining to a home seller that you will be applying for a second loan. In addition, down payment assistance can be even more complex than applying for FHA loans. Therefore, it makes more sense for sellers to choose a buyer who will be using a traditional loan to get their money faster.
If we have convinced you not to go down that road, you might also consider the scenario that you have a friend or loved one willing to help you out with some money. Strictly speaking, you can’t borrow this money from friends or family, but they can gift the funds to you as a present.
To rephrase a well-known quote, “No man is poor who has friends.”
USDA and VA Loans
Other government-backed loans you need to familiarize yourself with are the USDA and VA loan programs.
The U.S. Department of Agriculture and the Department of Veterans Affairs each insure loans of their own to help eligible Americans get closer to homeownership.
These two kinds of mortgages are very similar in that they both do not ask for a minimum credit score requirement, and you are also not obligated to make a down payment. However, USDA loans are only for people planning to buy a house in rural locations, while VA loans are only for eligible service members and veterans. With such requirements, there are fewer people who will be qualified, which is why most borrowers usually fall back on FHA loans.
These mortgages are genuinely meant to promote home buying, and VA loans also serve as a job benefit for the service our military officers have rendered for the country. So as much as possible, many lenders would look forward to offering these for Americans who deserve them. But today, due to the COVID-19 pandemic, as employment for many remains unstable, more mortgage lenders ask for a minimum credit score requirement.
With a 575 credit score, you are still welcome to apply for these loans. Be warned, though, not to pin your hopes on these options.
What to do with a 575 credit score
As with any other kind of dream, there will be obstacles along the way. They never said it was going to be easy!
Right now, you have a credit score that limits the opportunities available to you. However, you can still take control of your situation by doing the following things.
1 – Build better credit habits
It’s never too late to improve your credit score. You are just a few points shy of 580, which would help if you want to get an FHA loan. With a 580 credit score, you can make as low as a 3.5% down payment on your mortgage.
You can quickly earn five more points by taking advantage of the free credit report we are entitled to every year and making sure there are zero errors. In addition, you can easily clean up your credit history of negative items by making a call to the credit bureau and disputing their mistakes.
Finally, if you want to earn a good credit score, you must lessen your credit card debt and avoid missed payments.
2 – Hire a mortgage broker
No one can be more expert in the local mortgage industry than a mortgage broker.
Let’s face it, you will most likely only have to get a mortgage once, so learning the nitty-gritty of it doesn’t make as much sense for an investment.
If you want someone by your side to campaign for you and comb through the fine print, getting a mortgage broker is a perfect idea. You’ll be able to skip all of the inconvenience while your broker shops around for mortgage lenders. They might even get you the best deal because they will know where to look.
3 – Consider credit repair
If you haven’t heard of them, credit repair companies exist to help people in precisely this kind of situation.
Note that increasing your credit is something you are completely capable of doing on your own. However, it may take a lot longer than you expect. When you get credit repair services, what you’re buying is time. Think of how soon you need a mortgage loan and the funds to pay for credit repair.
Take a moment to reflect if this is something you need and then find out the best credit repair companies you can trust from peers who have tried them. It’s worth a shot!