If you’ve been wanting to buy a new home but your credit score is stuck at 580…
You may be in luck!
Home loans may be available to borrowers with a 580 credit score.
In this article we’re going to explore mortgage options for home buyers with a 580 FICO score.
RATE SEARCH: Get Approved for a Mortgage Today
580 Credit Score with a 3.5% Down Payment
The FHA will back a loan for borrowers with a 500 credit score and a 90% loan-to-value ratio, which is 10% down.
Although FHA lenders do not have to go by the FHA’s guidelines, and most have their own minimum FICO credit score guidelines they follow.
If a borrower has a 580 credit score then the FHA will insure the loan with just a 3.5% down payment.
Again, lenders do not have to follow the FHA guidelines. Many mortgage companies require a 620 credit score for FHA loans. However, there are some lenders who can approved home loans with a 580 credit score.
What are FHA loans?
The Federal Housing Administration was created in 1934 to help encourage home ownership in America.
The FHA does not offer the loans, they just insure the mortgage loan in the event the borrower defaults on the mortgage.
Because the mortgage is FHA-insured lenders are more willing to work with borrowers with lower credit scores, low income, or other traditionally high risk borrowers.
VA home loans are a benefit afforded to Veterans of the U.S. Military. If you’re eligible for a VA loan you won’t even need a down payment.
In fact, VA loans are the cheapest type of mortgage loan available because they don’t require mortgage insurance.
Even though the VA does not have a minimum credit score requirement most lenders will require at least a 620 credit score.
Some VA lenders may be able to work with a 580 credit score if you have certain compensating factors.
Compensating Factors for Bad Credit
- Large down payment of 10% or more (low loan-to-value ratio)
- High income (low debt-to-income ratio)
- Large amount of funds in reserves
- More than 5 years with the same employer
Raising Your Credit Score Before Applying
If you have bad credit then the best thing you can do to increase your odds of getting approved is to improve your credit rating.
There are a few strategies you can use that could increase your score quickly.
Pay down your credit card balances
Your credit utilization ratio is the amount of available credit you have used up on your credit card accounts.
For example if you have a credit card with a $10,000 credit limit and your balance is $5,000 your credit utilization ratio is 50%.
You want to try to keep your balances no higher than 15% of the limit.
Dispute Negative Account Information
You’re able to dispute anything on your credit report.
Even if you have a late payment or collection account that is actually accurate you can still dispute it with the three major credit bureaus.
The credit bureau has 30 days to complete an investigation and validate the reporting is accurate or else they must remove it by law.
After the 30 days has elapsed you will receive a letter with the results of the investigation. You may be surprised to find out that negative information is deleted all the time.
Credit Bureau Dispute Information
Consumer Dispute Center
P.O. Box 2000
Chester, PA 19016
Phone: 800-916-8800 – 8am-11pm EST
P.O. Box 4500
Allen, TX 75013
Phone: (714) 830-7000
Equifax Information Services LLC
P.O. Box 740256
Atlanta, GA 30374
Phone: (800) 846-5279
What is considered a bad credit score
A bad credit score is typically defined as anything below 580. A good credit score is usually in the 680-720 range. Here are the credit score ranges.
- 579 or under = Bad credit
- 580-619 = Poor credit
- 620-679 = Fair credit
- 680-719 = Good credit
- 720 and higher = Excellent credit
Get Your Free Credit Report and Score
In order to know where you stand you need to have a copy of your credit report. You can get a free report once a year at the Government website www.annualcreditreport.com.
Once you have your report check for any errors in your personal information or credit history. If you notice anything that is inaccurate you can dispute it with the credit bureaus directly.
You can also get your credit scores for free online. These sites allow you to monitor your credit history and scores completely free.
How Your Credit Score is Calculated
Your FICO credit score is calculated using an algorithm by FICO, the credit scoring company. Certain items in your credit history, such as payment history, credit inquiries, and even credit card balances make up your overall credit rating.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.