Wondering if your 500 credit score stands in the way of owning a home? You’ve come to the right place. While a lower score presents challenges, the Federal Housing Administration (FHA) loan program is specifically designed to make homeownership more accessible, and it may be an option for you. This guide breaks down the official rules, requirements, and steps you need to know.
An FHA loan is a mortgage insured by the Federal Housing Administration, a government agency. This insurance protects lenders from losses if a borrower defaults, which is why lenders are often willing to offer FHA loans to individuals with lower credit scores and smaller down payments compared to conventional loans. This program is a popular path to homeownership, especially for first-time buyers.
The most important thing to understand is that the FHA sets minimum guidelines, but individual banks and mortgage companies can have their own stricter rules. The FHA has two main credit score tiers that determine your minimum down payment.
If your credit score is 580 or above, you may qualify for the FHA’s most attractive benefit: a low down payment of just 3.5% of the home’s purchase price. For a \(250,000 home, this would be a down payment of \)8,750. This is the goal for many borrowers because it significantly lowers the amount of cash needed upfront.
This is the key category for anyone with a score in the low 500s. According to official FHA guidelines, you can still be eligible for an FHA loan with a credit score between 500 and 579. However, there is a major difference: you will be required to make a minimum down payment of 10% of the purchase price.
The FHA requires this larger down payment to offset the increased risk associated with a lower credit score. It shows you have more “skin in the game” and provides a larger equity cushion for the lender.
While the FHA officially allows for loans with a 500 credit score, finding a lender willing to approve one can be the biggest hurdle. Most mortgage lenders add their own internal requirements on top of the FHA’s minimums. These are called lender overlays.
For example, even though the FHA says a 500 score is acceptable with a 10% down payment, a specific lender like Chase or Wells Fargo might have an overlay requiring a minimum score of 620 or 640 for all their FHA loan applicants. They do this to further minimize their risk.
This means you will need to be persistent. You will have to shop around and contact multiple lenders to find one that is willing to work with your credit profile. Consider looking beyond the big national banks and exploring:
Your credit score is just one piece of the puzzle. To get approved for an FHA loan, you must also meet several other important criteria. Lenders will look at your entire financial picture to ensure you have the ability to repay the loan.
Your DTI ratio compares your total monthly debt payments (like car loans, student loans, and credit card payments) to your gross monthly income. The FHA generally wants to see a “front-end” ratio (housing costs only) of no more than 31% and a “back-end” ratio (all debts included) of no more than 43%. Some lenders may allow for higher ratios if you have compensating factors, like a large cash reserve or a higher down payment.
Lenders need to see that you have a reliable source of income. Typically, they want to see a consistent employment history for the last two years. You will need to provide documentation to prove your income, which usually includes:
All FHA loans require you to pay a Mortgage Insurance Premium (MIP). This is not the same as homeowner’s insurance. MIP protects the lender, not you. There are two parts to FHA MIP:
The home you want to buy must also meet the FHA’s minimum property standards for health and safety. An FHA-approved appraiser will inspect the property to ensure it is in acceptable condition before the loan can be finalized.
If you are serious about buying a home, here is a practical plan to improve your chances of success.
What if my credit score is just below 500? The FHA generally does not insure loans for borrowers with scores below 500. However, in rare cases, lenders may make an exception for applicants with a non-traditional credit history (e.g., a long history of paying rent and utility bills on time) but no established FICO score. This is very uncommon, and your best bet is to focus on getting your score above the 500 mark.
Does the 10% down payment include closing costs? No, it does not. Closing costs are separate fees for services like the appraisal, title search, and loan origination. You should budget an extra 2% to 5% of the home’s price to cover these expenses. In some cases, you may be able to negotiate for the seller to pay a portion of your closing costs.
How long does it take to improve a credit score? It depends on your specific situation. Making consistent on-time payments and paying down debt can start to positively affect your score in as little as 30 to 60 days. Correcting errors on your credit report can also provide a quick boost. Significant improvements, however, often take several months of disciplined financial habits.