So you just got your credit report, and you saw that you only have a 600 credit score. So you’re thinking, “This is bad news. How can I ever get approved for a loan with a 600 rating?”
Hold your horses! It’s not yet the end of the world. We’re here to tell you today that 600 is not the lowest you can go, even if you are aiming to apply for a home loan. If you haven’t heard of them by now, there are actually government-backed loans you can check out that can still help you in this kind of situation. And if you do find that a government-backed loan is still not going to provide what you need, we are also here to give you a few tips on how to boost your credit even just by a tiny little bit, so you can get closer to that dream home you are targeting.
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How bad is a 600 credit score?
Since you already have some idea that 600 is considered bad credit, let’s dissect that concern for a while. After all, there are different levels in the FICO Score range, and 600 might not be as close to rock bottom as you might think.
As you probably already know, the FICO scoring model is just one of the types of credit scores you can find when receiving your credit report. But it is also the most popular system used, which is why we’ll be using it today to give you a better view of how credit scores work.
If you want to lend anyone any money, you’ll want to know the probability of this borrower paying you back. So maybe you’ll ask around if other people have loaned them funds and if they were able to return the money when they said they would.
Essentially, this is what credit scores are used for. And with FICO, there are five factors they consider to evaluate your creditworthiness. These are:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- New credit accounts (10%)
- Variety of credit (10%)
As you can see, how often you pay your bills in full and on time can drastically affect your credit score. This is why even if you miss a single payment deadline, you will really notice a big difference by the time you receive your next credit report.
Now, let’s talk about how concerning a 600 credit score truly is. First, keep in mind that FICO Scores have a range of 300 to 850, with 300 being the lowest and the 850 the highest credit score you can get.
According to FICO, this is how they define each range of scores:
- 300 to 579 is Poor
- 580 to 669 is Fair
- 670 to 739 is Good
- 740 to 799 is Very Good
- 800 to 850 is Exceptional
A 600 FICO Score then clearly falls under the Fair range, which is neither the worst you can get nor in the at least Good enough bracket. But don’t worry, because there are definitely still mortgages you can apply and get approved for even with this kind of FICO Score.
What is the minimum credit score to get a mortgage?
If you came to this article with no idea of the loan types out there in the market, we definitely have some good news for you. So yes, indeed, there are at least two mortgage loans you can avail of with a credit score of 600.
First, let’s talk about the loan program that doesn’t require a minimum credit score as long as you buy a home in a rural area. This is the USDA loan program, which, as its name implies, is insured by the U.S. Department of Agriculture. Don’t worry, though, because you don’t have to be a farmer or in the farming industry to become qualified.
For the USDA loan, you might get approved much faster if you have a credit score of at least 640, but this is only because you’ll experience automated underwriting. If you have a credit score of 639 and below, the USDA will have to ask you to get manual underwriting to ensure that you will take on the responsibility of repaying your loan. On the upside, you don’t need to make a down payment for a USDA loan. And you can check this page if you want to know if your real estate’s location is eligible for this application.
If you want to know the real minimum credit score needed to buy a house anywhere you want, you will need an FHA loan.
FHA loans are mortgages insured by the Federal Housing Administration. They’re really meant to aid first-time homebuyers to get their dream homes. However, even borrowers with credit scores in the Exceptional range or those with a lot of experience in real estate can still be eligible to borrow under this loan program.
The minimum credit score requirement of an FHA loan is 500, and with this credit score, you will need to make a minimum down payment of 10% of your home’s purchase price. If you do have a score of 580 and above, you can be allowed to make a payment of as little as 3 percent. Isn’t that great? Do keep in mind, though, that the lesser down payment you give, the more you’ll be paying in the long run. Interest rates do compound! So if you can afford to pay more, go for it.
How can you improve your credit scores?
It’s not always easy to boost your credit score. It can take a lot of hard work, discipline, and time. For this reason, we recommend that you plan way ahead of your home purchase plans, ideally at least 6 months before you buy a house, to give you ample time to improve or repair your credit score.
Since you already have a 600 credit score, you do already qualify for FHA loans and USDA loans, but these can limit your options when it comes to shopping for your home. So in case you’re planning on getting more space for yourself or your loved ones, and you do have some time on your hands, you should definitely consider improving your credit score.
Here are just a few of the ways that many people have successfully used to increase their scores even up to a hundred points.
Scrutinize your credit report
When people receive their credit reports, they sometimes don’t look any further than the credit score under their name. This can be a big mistake, especially if you are working to improve your credit score. Although it may seem tedious, we recommend that you go item by item because each line that appears on your credit report does contribute to the credit score you get. If you see anything you don’t actually remember doing, say someone made a hard inquiry for a credit card application you didn’t really apply for yourself; this is something you can dispute. That’s already at least 5 negative points in there you can strike off your record to increase your score.
It’s also a little disturbing to know, but errors in credit reports are actually just getting more frequent. You don’t want to be that person who finds a so-and-so from Ohio making late payments appearing in your file!
Pay down your debt
The amount of money you owe across the board matters to at least 30% of your credit score. If you’re still paying a lot of debt by the time you start applying for home loans, this will not look good both for your credit score as well as to mortgage lenders.
For one, lenders also look at your debt-to-income ratio, which is the amount of money you owe against the amount of money you make. For easier computation, say you make ten thousand dollars every month, but you have to pay at least $6,000 for all of your bills combined. This only leaves you with $4,000 to do with as you please, for buying your food, for putting into your savings, and others. With this kind of debt-to-income ratio, you definitely won’t be approved for any home loan, so it’s just a generally good idea to make sure you lessen your debt by the time you get to this point. This will have a domino effect on your credit score as it lessens your amounts owed and shows bills being paid in full and on time in your payment history.
Get a credit limit increase.
Let’s say you can’t really afford to pay down your debt at the moment. However, there’s still one way you can try to improve that 30% section of your credit score.
Another way to look at amounts owed in your FICO Score is to consider your credit utilization ratio. This one shows how much money you’re actually borrowing against the total amount of money you are allowed to borrow. Since you are planning to apply for a mortgage, we recommend keeping your own ratio below 30 percent. For example, say you have 3 credit cards. Put together all your credit limits make a total of 15,000 dollars. This means that if you want to keep your utilization low, you will want only to charge less than $4,500 to your credit cards every month. But say you’ve had these cards for a while. In fact, your income had already increased significantly since when you actually applied for these credit cards. You can apply for an increase in your credit limit on each card to increase the total amount of money you can actually borrow. You’ll probably have to submit proof of your income, but this will definitely help your credit score improve in a few weeks.
What are the other loan options out there?
To help you get motivated to work on your credit score, here are two more loan types that you will be able to avail yourself of if you can increase your FICO Score by at least 20 to 40 points.
If you’re planning to buy more houses and an FHA loan won’t cut it, you’ll probably need a traditional mortgage or what they call a conventional loan.
These mortgages require a minimum credit score of 620 and, depending on your rating, can ask for as little as 3% for a down payment. Again, no two borrowers are the same; however, the same goes for mortgage lenders, so note that there are those out there who might not approve a score less than 640 for applications for conventional loans.
Finally, we’re obligated to mention this because it almost feels like a crime to pass this up with the benefits you can get. You can also apply for a VA loan or a mortgage-backed by the Department of Veterans Affairs if you have actually served in the military (or you are the spouse of someone who has).
VA loans are one of the most in-demand mortgages today because of recent legislation that removed previously held loan limits. Like USDA loans, VA loans do not ask for a minimum down payment. And the mortgage rates are some of the most agreeable you can find in the industry.
Since this is a government-backed loan, mortgage lenders can be more willing to get lax on the terms, so even though the standard credit score required to avail of this type of loan is set at 640, they can be ready to approve your application with a slightly lower credit score, if you can show that you are highly capable of paying or can make a non-required down payment.
That’s all for today!
Now that we have discussed the options you can choose from and actions you can make, we hope we could enlighten your concerns on meeting mortgage credit score requirements with a 600 credit score. There might be even more out there, depending on your location. We wish you good luck in your journey as you explore. Don’t be afraid to ask for help!