When qualifying for a home loan, most lenders require a minimum credit score of 620 for a conventional loan. While this might be below the national average range of 660 to 720 in 2017, one survey found that 1 out of 5 Americans (or 20%) still blamed poor credit as the obstacle blocking their path to home ownership.
All it takes is a series of financial mistakes, such as being late on bill payments, defaulting on loans, or taking on too much debt, to kill your credit score. But having poor credit doesn’t automatically disqualify you from home ownership, not when there are loan options with more forgiving credit score requirements, a few of which are listed below.
FHA Home Loan
The National Housing Act of 1934 created the Federal House Administration to increase the number of home-owning Americans during the Great Depression. The agency issued government-insured FHA Loans with comparatively lenient credit score standards and low down payments through approved lenders.
How low? While most home loan options require a 620-640 credit score, you can qualify for an FHA Loan with a credit score as low as 500. The required down payment would depend on your credit score, with 10% down for the 500-579 range, and 3.5% for any score above that.
The FHA isn’t a charity organization, however, as you still have to meet certain requirements to compensate for your low credit score. You also need to prove that you legitimately fell on hard times to explain why you fell behind on your monthly dues and give the FHA some kind of assurance that you’ve reformed and are on track to rebuilding your credit.
USDA Single Family Housing Guaranteed Loan
The Single Family Housing Guaranteed Loan Program by the U.S. Department of Agriculture (USDA) offers guaranteed home loans with zero down payment in an effort to help low- to moderate-income families acquire safe and decent housing in eligible rural areas.
The absence of a down payment, however, means the program’s credit score requirements are a little higher, with most lenders requiring a credit score of at least 640.
“Rural” areas aren’t restricted to the outskirts of towns and cities. In fact, the USDA classifies more than 90% of US as “rural,” so you’re more than likely to find a nice home in your state.
VA Home Loan
VA loans allow active military personnel, veterans, and surviving spouses of veterans to qualify for flexible, no-down payment loans backed by the U.S. Department of Veterans Affairs.
Benefits include:
- VA loans are one of the few true zero down payment mortgage options on the market.
- Borrowers don’t have to pay mortgage insurance fees because these loans are backed by the VA. This perk translates to lower monthly mortgage payments.
- The VA does not set a minimum credit score to qualify, but lenders have the discretion to set their own credit score requirements. Still, it’s not uncommon for lenders to allow credit scores in the 580 to 620 range.
If you want to learn more about these low-credit home loan options, get in touch with Chris Lamm for a consultation.