What can a 560 credit score home loan get you?
According to Experian, roughly 16% of people have FICO Scores in their defined “very poor” bracket. In this category, your score will fall somewhere from 300 to 579, and unfortunately, this is where a 560 credit score can be found.
However, there is still hope on the horizon because even with a 560 credit score, you can still find yourself eligible for some types of home loans. In addition, you’re even just twenty points away from being allowed to put a 3.5% down payment on your future house. And, depending on where you’re planning to buy property, you might not even have to make a down payment at all.
If that has piqued your interest, don’t worry because we’ll be elaborating later on. Today, we aim to help you get one step closer to your dream home by answering the following questions:
- Why is 560 considered very poor?
- What type of loan can I avail with this score?
- How can I improve my rating?
Mortgages are one of those subjects in personal finance that everyone needs to learn more about. Unfortunately, only 17 states actually require students to be knowledgeable in this essential life skill. If you think there’s still a lot left for you to master, don’t beat yourself up about it! This is a safe space for anyone who wants to learn, and your journey will definitely not end here. Read on!
Different kinds of debt have different minimum credit score requirements. The higher your score, the bigger your world of options. Unfortunately, this also means that lower credit scores will also make you feel like you are always banging out of luck.
The fact of the matter is that our whole financial system is built on a very important concept: trust. We trust that the system will work; we trust that we will succeed just as long as we keep working hard, and banks entrust borrowers with credit just as long as the system says that they are reliable.
Our credit scoring system is an integral part of this whole process that keeps the economy running every day, and without it, we might as well flip a coin whenever we need to decide if we should lend that person this money. So, for example, credit scores help mortgage lenders determine if someone can be trusted to repay a loan, and this is very important because, just as we saw during the last financial crisis, if we merely keep letting people borrow money they can’t afford to pay back, the system quickly devolves into a house of cards that falls fast.
How Bad Is Very Poor Credit?
We often hear the phrase bad credit, but this term really means different things for different people. For example, a score of 620 can already be considered bad credit for someone who’s aiming to get a jumbo loan. And even if you do have a score in the 500s, it can simply mean that you don’t have much credit history yet to go on.
To understand our credit scores better, it will be useful to learn how these are computed. For consistency, we’ll refer to the FICO Score system, and this is how they calculate for our credit scores:
- 35% payment history
- 30% total amount of debt
- 15% length of credit history
- 10% variety of accounts
- 10% new accounts
Since the biggest slice of this pie goes to our payment history, it is usually the culprit when we get a lower credit score. To be sure, you might need to ask yourself the following questions:
- Have I missed a payment in the recent past?
- Have I at least once paid less than the minimum amount required?
- Have I defaulted on any of my old debts?
Even if you answer just one “yes” to the questions above, this is most likely the reason for your 560 credit score. But there’s definitely hope if you are willing to ensure steadier payments moving forward.
Another common reason for a low credit score is the lack of data found in your credit report.
Some people can proactively avoid debt even up to their forties or until such time that they are left with no other option. This means that they were probably even able to build a lot of savings, but when it’s become more convenient to borrow money, they don’t have enough financial history to show in their portfolio.
You could also be just fresh out of university with only a credit card or two under your name, just starting to save up through your new job, and with no idea how to increase your credit.
There’s good news for both cases. Low credit scores due to inexperience are actually the easiest to improve. You might need to wait a month or two, and during these months, you have to ensure that you start on a flurry of activity: ensuring that you don’t have any missed payments, adding more income to your bank account, and applying for just the one new credit account under your name. When we say just one account, we mean just one because 10% of your score comes from accounts recently opened. You don’t want to let the mortgage lender think that you’re acquiring more and more debt in a very short period.
Minimum Credit Score Requirements
Now it’s time to find out just what loan options are available with your particular credit score.
As we’ve previously mentioned, the lower your credit score, the fewer options you may have, but there are definitely offers you can still take. Here are the best of them.
An FHA loan is a mortgage that the Federal Housing Administration insures. Since this is a government-backed loan, you don’t have to pay separate mortgage insurance, but the loan limits can be lower than conventional loans (traditional mortgages).
To qualify for an FHA loan, you only need a minimum 500 credit score. With this score, you’ll be asked to give an upfront 10% down payment, but if you want to get that down to 3.5%, this is possible if you can increase your rating to a 580 credit score.
It’s common for first-time homebuyers to get an FHA loan because this loan type was created specifically for this purpose. If you have a low credit score due to inexperience, you will do well to buy a house through an FHA loan.
If you don’t think FHA loans are for you, like maybe a 3.5% down payment is still too steep, or maybe you do have a score below 500, you still have the option of taking on a USDA loan.
The U.S. Department of Agriculture backs this type of mortgage. The best thing about it is you’re not required to make any down payment; however, you will have to make sure that you are buying real estate in an eligible rural area. And if you don’t know if you are, you can find out through this useful link.
Typically, home buyers with credit scores over 640 can have a smoother application experience with a USDA loan. If your FICO Score falls below this number, you will be asked to explain the circumstances that affected your current rating. But when it comes right down to it, USDA loans actually don’t have any credit score requirements at all.
Before You Go
And there you have it.
Even if you have a 560 credit score, you can definitely still buy a house, but we do recommend trying to talk to at least one mortgage lender before you do so. It can highly work to your advantage if you can get pre-approval from mortgage lenders so you already know how much house you can afford before you even start shopping in the neighborhood.
However, we highly suggest that you work on improving your credit because even just 20 points up from 560 can make a world of difference, especially if you are interested in FHA loans. For example, instead of paying a 10% down payment, with just 20 more points to your credit score, you’ll only have to pay 3.5 percent, and that’s pretty sweet!
Finally, it will be good to keep an eye on your credit report from this point on. In case you didn’t know it yet, you can actually get yours for free. Doing so will appraise you of your progress, and you might even be able to correct any errors before they inflict any harm on your future financial prospects.
This is something that you can control! And we’re so glad that you’re already taking steps to improve your situation. If you need further help, you know where to find us!