I have a 580 credit score. What home loans can I apply for?

If you’ve seen your credit report and know your credit score, you’ve made the first step in the mortgage application process. The next step is finding out what kind of loan you should be aiming for to have a higher chance of getting approved.

Logically, borrowers will want the best type of loan that gives the most savings, but you can really only choose from the types of mortgages that qualify you. For instance, conventional loans usually provide better deals than government-insured home loans, but if you have a 580 credit score, you will not meet the minimum credit score requirement. You don’t want to waste your time trying out for a mortgage that is out of your reach. It’s better to stick to a target. After all, with each new loan application, points are taken off your score.

In this article, we’re going to list precisely what mortgages you should be reading about and the biggest mortgage lenders who can offer these options.

Why do lenders ask for a minimum credit score?

Some people find it flex-worthy to have an 800 or higher credit score. Others may find it embarrassing to have a bad credit score which typically falls below a 670 if we’re talking about FICO. But are credit scores that big of a deal?

It all depends on your perception.

Credit scores are one of those adult things that eventually affect aspects of our lives. These ratings don’t just affect loan application outcomes; they can also decide where we live or work. Did you know that some employers refer to your credit score to determine your trustworthiness?

Once we overcome specific points in life, though, these numbers stop making any difference.

Right now, credit scores will be significant to you because if you don’t get it up to a certain level, you cannot qualify for a mortgage loan you need. So if you want to be eligible for a traditional loan, for instance, it would be good to have a credit score of 620, but it will be even better to have at least 670, so you won’t have to worry about lenders saying no.

With traditional loans, you have the option to not pay for private mortgage insurance (PMI) since it doesn’t benefit you. Unlike other kinds of insurance that give you benefits in case of a mishap, PMI protects the lender, not you, the borrower. If you can’t qualify for such a loan, you might have no choice but to pay up.

At this point, credit scoring may sound unfair, but it is necessary for our economy. There are many reasons people get lower credit scores that they have no control over. But the system is built to reward consumers who consistently maintain good credit. So if you have lower credit, you can get fewer opportunities for no fault of your own. But in the broader scheme of things, credit scores serve as a shield for the economy against increased loan defaults. You might be old enough to remember that just a decade ago, we had a financial crisis that, to some extent, was brought about by irresponsible lending and borrowing. It’s a situation we want to prevent as much as possible.

It’s not all bad, though, because having a credit score has its benefits. Unfortunately, many people in America do not even have a credit score. These are invisible to people who never use credit cards and possibly don’t even put their money in banks. For them, it can be even harder to apply for any mortgage.

If you have a credit score, this works for you because you earn a lot of savings if you pay your bills on time and do not max out your credit cards. In addition, a lower credit score can dampen your chances of borrowing a large amount of money you certainly cannot afford. So it can help you avoid big temptations that might eventually cause you bankruptcy and ruin.

Home Loans with 580 Credit Score

FHA Loans

The Federal Housing Administration ensures the first type of home loan you need to know about as a borrower. If you’re buying a house for the first time, there is a higher chance you’ll get an FHA loan because, with FHA, you can get access to down payment assistance programs or first-time homebuyers’ grants.

For FHA loans, it does not matter where your house is located, so you have more freedom to choose where to settle down.

Since you have a 580 credit score, you can either put a minimum 3.5% down payment or choose to pay at least 10 percent, depending on how much savings you’ve built. Borrowers with credit scores 579 and below can only make a minimum of 10% money down, period.

Since many people who avail of FHA loans tend to come from low-to-middle income brackets, the FHA recognizes that many won’t be able to pull this down payment out of pocket. So they allow people to use gifted funds or cash grants to deposit an FHA loan. Gifted funds must come from family or friends who may have a specific interest in your home purchase.

You do have to consider that you will be paying the FHA loan’s version of a PMI. With an FHA loan, mortgage insurance is unavoidable. You pay upfront insurance at closing and, if you spend less than a 10% down payment, you pay monthly mortgage insurance for the whole life of your loan. For this reason, lots of people eventually switch away from FHA to a conventional loan once they get their credit scores high enough to qualify. Note that it can be challenging to get a refinance later on, even if interest rates do go down and your credit score has improved. Make sure you discuss this with your mortgage lender before you get to closing.

USDA Loans

Two government-backed loans are zero-down payment programs. The U.S. Department of Agriculture backs the first one we’ll discuss.

Contrary to how it sounds, though, you don’t have to buy a farm or take up farming yourself if you get a USDA loan. Instead, it’s a strictly residential home loan. So you are not allowed to use the house for commercial purposes even if the property might contain certain features.

The main requirement of a USDA loan is to buy a house in a rural area. If you don’t know if your property may be considered rustic, you can find out here.

There is no minimum credit score defined on the USDA’s end, but be aware that your lender might ask for one. In general, it’s easier to qualify for a USDA loan if you have a credit score over 640 because you can get automated underwriting. However, since you have 580, you will be asked to explain why you have a lower credit score. So be informed that it will be wise to be ready with documentation for the derogatory items in your credit history. For example, if you acquired an illness or disability that lessened your income opportunities, this can be a valid reason for your bad credit.

If you plan to move into this house with family or other people, know that there is also a household income limit determined by the state where you’re purchasing a home. Therefore, the application will include the income declarations of all the members of your household. Check this link to see if this might be a problem for you.

VA Loans

The second government-insured mortgage that’s worth checking out due to zero money down is guaranteed by the Department of Veterans Affairs.

If you are one of the lucky people eligible for this kind of mortgage, this might provide the best loan terms for you. To qualify, you have to be one of the following: a service member, a veteran, or a qualified spouse of a veteran who has already passed.

Similar to USDA loans, they don’t exactly ask for a minimum credit score for VA loans. Just be warned that requirements do vary across different mortgage lenders, although some would be willing to accept a 580 credit score if you can make up for it in other areas of your application.

If you find a lender that says you are qualified with a 580 credit score, this is the better option to choose than an FHA loan. You can buy a house anywhere in the country, and you won’t have to worry about mortgage insurance premiums. Instead of PMI, a VA funding fee is paid at closing, and the amount depends on how many times you’ve availed of the VA loan program.

Historically, the VA loan also has the most competitive rates on the market. Therefore, you will be likelier to pay less with this kind of home loan than an FHA or USDA loan.

5 of The Best Mortgage Lenders to Check Out

Alterra Home Loans

If you’re aiming for a lower down payment requirement, Alterra is a good choice. They may have higher rates and fees than other lenders, but it may not matter if you’re planning on a refinance anyway.

Another good thing about Alterra is that they can do manual underwriting and approve your loan based on alternate income and credit sources. Submitting documents for employment can usually be a problem for freelancers or self-employed individuals, so it’s good to know Alterra can be an option.

Flagstar Bank

Flagstar is a bank based in Michigan, but it does originate mortgages in all 50 states.

Flagstar has mortgage advisors who can help you avail of low-down-payment programs all over the country, especially if you are a first-time homebuyer.

Rates can also easily be found on their website after you answer a few personal questions.

Guaranteed Rate

If you want a completely online mortgage application, Guaranteed Rate is a great option. You might even save more money since you can easily upload your requirements and digitally sign the necessary documents.

You also won’t have to guess their rates. This lender is more transparent, and you don’t have to give out personal information to get a figure for your kind of situation.

Guild Mortgage

If you want to make both online and personal inquiries for your mortgages, Guild provides services that can do either.

They also have a program that might excite you, especially if you’re looking to buy a new home fast. With their Homebuyer Express 17-Day Closing Guarantee program, the lender will have to pay a $500 penalty if the mortgage is not closed by the promised deadline.

New American Funding

This nonbank lender offers all types of government-backed loans, cash-out refinance mortgages, home equity lines of credit, and reverse mortgages.

If you are a first-time home buyer, they can either offer you their first-time homebuyer programs or work with you to find the most convenient down payment assistance program.