Mortgage Lenders that Accept 500 Credit Score

If your credit score is around 500, you may still qualify for a mortgage through specific programs and lenders. Some 500 credit score mortgage lenders offer options like FHA loans with flexible requirements. It’s important to understand the terms, interest rates, and down payment conditions before applying. A low score doesn’t mean homeownership is out of reach—it just needs careful planning.

FHA Loans

FHA or Federal Housing Administration loan is a type of mortgage insured by FHA and overseen by the US Department of Housing and Urban Development. In this, big banks or other lenders provide financing or loans to people with a low credit score, such as 500.

The best part is that these loans come at a minimum interest rate, generally around 3 to 5%. These also require a low down payment, which makes them suitable for first-time homebuyers. Here are a few requirements to qualify for the FHA loans:

• As low as 580, however, some lenders may accept a credit score of 500.
• A down payment of 3.5% if your credit score is 580 and 10% down if your score is 500 to 579.
• A debt-to-income ratio of 43% and sometimes up to 50%.
• An upfront premium of 1.75% of the loan principal is typically paid at closing, along with annual premiums ranging from 0.15% to 0.75%.

Pros

• Lenient Borrowing Requirements: The FHA doesn’t have strict limitations on down payments, debt-to-income ratios, and credit scores. This means you can still get your ideal home even if your finances aren’t in perfect shape.
• Low Interest Rates: With poor credit scores, you can get conventional loans, but they come at a high interest rate, which can make you feel as if the home is costing you an arm and a leg. However, that’s not the case with FHA loans. The interest rate on FHA loans is minimal, which lowers your monthly payments and overall loan cost.
• Down Payment Assistance Program: In FHA loans, you have the freedom to get down payment assistance, which isn’t typically available for traditional loans. You can use gifted cash from friends or family and may also receive grants from the local or federal government to cover the down payment.

Cons

• Strict Property Perquisites: FHA loans have some strict guidelines that you must follow. For instance, the property you buy shouldn’t be a vacation home and meet health and safety standards.
• Mortgage Insurance Premiums: While the requirements to qualify for an FHA loan are quite flexible, borrowers still have to pay mortgage insurance premiums that can add to the overall cost of the loan. Currently, the UPMIP is 1.75% of the loan’s base price, which can sometimes be a burden.

USDA Loans

If you are struggling to find mortgage lenders that accept 500 credit scores, you should consider availing the USDA home loan. USDA home loan is a type of zero-down payment mortgage for home buyers in eligible rural and urban areas.

These loans are guaranteed by the USDA Rural Development Guaranteed Housing Loan Program, which is a part of the US Department of Agriculture.

Compared to FHA loans that don’t allow you to spend money on home renovation, USDA loans are financial rewards, and you can utilize them to upgrade or repair your home. The loans are capped at $40,000, while the grants are around $10,000.

Here’s an overview of the requirements to qualify for USDA home loans:

• Be a US citizen or primary residence
• Have a credit score of 640, but some lenders accept as low as 500
• Show a record of dependable income

Pros

• No Down Payment: Do you have no down payment in your account but want to own a new home as early as possible? Don’t worry! USDA loans can make this easy. Since these loans are insured by the US government, lenders face less risk, and they are willing to give you a loan with $0 down, making financing your home a breeze.
• Easy Credit Guidelines: Although the USDA requires a 640 credit score, some lenders are willing to accept scores as low as 500 so everyone, despite their financial standing, can get a place to live. Just submit a manual underwriting and some other documents, like proof of income, and you are done.
• No Prepayment Penalty: Many lenders charge you a fee, aka penalty, if you pay off your loan earlier than the agreed time. It’s because this action makes them miss an interest amount they were counting on. Gladly, there’s no such issue with USDA loans, and you can prepay the loan if you have the cash.

Cons

• Property Eligibility: You cannot use USDA loans to buy any property. Instead, you’ve to ensure that the property you are interested in lies in the eligible category, whether rural or urban, which can be pretty restrictive.

• Income Limits: USDA loans mainly target low- to modern-income home buyers. For instance, if you want a home with 1 to 4 members, the income is limited to $110,650 to qualify for the loan.