UPDATED: September 25, 2022

If you’re still renting after years of working hard and saving up, you probably dream of buying your own home soon enough. Unfortunately, if you have a 500 credit score, you’ll doubt if you’ll ever get approved for a home loan.

We hear you. A lot of people make financial mistakes that result in bad credit. But even so, it’s still possible for you to secure a loan with a credit score of 500.

What are your options? That’s what we looked into in this article.

We scoured the web for the best tips on how to get a loan with poor credit scores and checked the official sites of various lenders. We’ve also gathered useful advice on improving your credit to increase your chances of getting a better deal.

So, don’t miss out on the critical steps for boosting your credit score from 500. In the end, we share one unique tip that can help you buy your dream home.

What’s the average mortgage loan you can get with a 500 credit score?

On average, you might be approved for a home loan with a 500 credit score if you pay a 10% down payment.

If your credit score is 500, it’s considered “poor” or “bad.” Based on FICO, this score is in the range of 300 to 579, or Very Poor.

FICO ScoresRating
800 – 850Exceptional
740 – 799Very Good
670 – 739Good
580 – 669Fair
300 – 579Very Poor

With a very poor credit score, you’re considered a high-risk borrower because you’re more likely to become delinquent with your payments.

Statistics show that 62% of consumers with very poor credit tend to go more than 90 days behind their payments and become seriously delinquent.

What credit scores do lenders require to approve you for a better home loan? It varies per lender, but it’s usually 620 and above.

The minimum credit score depends on the loan type.

  • FHA loans – 500 (10% DP); 580 (3.5% DP)
  • VA loans – 620
  • Conventional loans – 620
  • USDA loans – 640
  • Jumbo loans – 700

What are your home loan options if your credit score is 500?

If you have a 500 credit score, your best option is an FHA loan. Then, there’s also what’s called a non-qualified mortgage (non-QM).

1. FHA loans for bad credit

FHA loans are backed by the Federal Housing Administration and are specially designed for first-time homebuyers. These are private loans that are regulated and insured by the FHA.

In 2022, the nationwide minimum FHA loan you can borrow is $420,680, and a maximum of $970,800 for a single-family house. These floor and ceiling limits are updated every year and also vary per county.

As mentioned, you’ll have to shell out a 10% down payment. So if you’re buying a $450,000 home, you have to prepare at least $45,000 DP.

If you can increase your score to 580, your down payment will only have to be 3.5% or $15,750.

For a 30-year FHA loan, the interest rate averages at 6.5%, with an APR of 6.95%, based on TheMortgageReports lender network estimates as of writing.

This rate is more expensive than conventional loans, but if you could increase your score to 580, you can get a rate that’s more affordable.

Here’s an FHA loan mortgage calculator that you can use.

Some of the best lenders for FHA loans are:

How do you qualify for an FHA loan?

Aside from the down payment, you’ll need to meet the following requirements to qualify for an FHA loan:

  • You have a debt-to-income (DTI) ratio of no more than 50%
  • You can show a steady income and employment history
  • The house you plan to buy will be your primary residence
  • You don’t have any foreclosed property in the past three years

These are FHA requirements. Individual lenders may have additional qualifications.

2. Non-QM mortgage for 500 credit score

How can you buy a house with bad credit but good income? A non-QM mortgage might be right for you.

A non-QM mortgage is specifically designed for homebuyers who don’t meet the strict criteria of most traditional lenders, such as income, DTI, and certain documentation.

This means that you can still borrow money to purchase a home, even with bad credit. However, the federal government set the qualified mortgage rule (QM Rule) that took effect in 2014 to protect borrowers from risky financial products.

Regardless, you may still find lenders that offer non-QM loans to borrowers with credit scores that are as low as 500. But you’ll be in for much higher interest rates because government agencies like FHA or VA do not back them.

Non-QMs are typically more difficult to find, so you’ll have to check banks’ specialty product offers.

It’s also a good idea only when you can’t meet the qualifying mortgage criteria but earn a regular income and can make on-time mortgage payments. Otherwise, you’re highly at risk of defaulting on your home loan.

You might benefit from non-QM home loans if:

  • You’re a retiree
  • You’re a business owner
  • You’re self-employed
  • You have a high DTI
  • You get your living expenses from your investments
  • You have high assets but low income

Some banks that have non-QM programs include:

What other factors affect mortgage rates?

Aside from your credit score and the down payment, mortgage lenders also consider other factors to determine the interest rates on home loans.

  • Debt-to-income (DTI) ratio – This pertains to how much debt you already have relative to your income. It’s an indication of your ability to pay your monthly mortgage. Most lenders prefer a DTI of 36% or lower.
  • Cash flow – Lenders also look into your employment history, which can indicate how stable your income is. They check your tax returns, W-2 forms, and savings account.
  • Loan-to-value (LTV) ratio – This refers to how much money you’ll need to pay back compared to the value of the property. If you have a bigger down payment, you can lower your LTV, making you a less risky borrower.

How to improve your credit score before applying for a mortgage

While you can still be approved for a home loan even with a 500 credit score, it’s better to improve your credit standing first. 

Doing so will make it easier for you to find a mortgage lender with a more affordable interest rate. That will save you time and minimize hard pulls on your credit report, which would also pull down your score.

So, how do you gain more points and increase your odds of getting a better home loan? Here are some tips:

1. Reduce your credit utilization

Your credit utilization affects up to 30% of your credit score. To increase your credit score, you must keep your credit utilization at 30% of your credit limit.

High credit utilization can chop off up to 50 points from your score.

2. Pay your bills on time

You must pay your bills on time because payment history accounts for 35% of your credit score. Any missed payments beyond 30 days could make you lose as much as 110 points and will remain on your record for seven years.

Bonus tip: If you’re paying bills, like utilities, rent, and phone lines, that aren’t reported to the credit bureaus, you can request the company to report your payments. Alternatively, you can look for companies that report to bills payments in the first place.

Unfortunately, you can’t self-report to the bureaus.

3. Review your credit reports and dispute errors

It’s helpful to make it a habit to review your credit reports. You’re entitled to one free credit report each year from the three national credit bureaus: Experian, Equifax, and TransUnion.

Due to the pandemic, they’re offering weekly free credit reports until December 31, 2022, so you can take advantage of it.

If you find any inaccuracies which can pull your score down, send a dispute letter to the credit bureaus and the creditor. You need to provide supporting documents to prove your claims.

They will launch an investigation and correct the information or remove negative entries if your request is valid.

4. Keep old credit lines open

You might think it’s better to close old credit lines that you no longer use, such as credit cards with high interest. However, the age of your credit history accounts for up to 15% of your total score.

So, keeping your old credit lines open after paying them off can help you improve your credit score. You can call your credit provider to waive any annual fees, too.

5. Don’t apply for a new credit line

Applying for a new loan or credit card could reduce your credit score because creditors will make hard inquiries on your credit records.

So, if you don’t necessarily need more credit, don’t apply for a new one. It will help you keep your credit utilization ratio down and improve your credit score.

When your credit score has increased, you can start checking home loan rates. However, remember to space the inquiries out with 30 days in between.

6. Get a secured credit card

If you must open a new line of credit, it’s better to get a secured credit card. Secured means you’ll have to deposit the full amount of your credit limit first, which makes you a less risky borrower.

Use the credit card for some purchases, keeping your credit utilization below 30% and paying your bills on time. These will be reported to the credit bureaus, which can help boost your 500 credit score.

7. Follow a debt management plan

If you find it hard to pay your bills and manage your debt on your own, consider working with an expert.

You can find free credit counseling services where a credit counselor can help you evaluate your finances, plan how to manage your debt, and find relief.

You may also work with a non-profit credit counseling agency that can help you negotiate with your creditors a debt payment arrangement that will work for you. That way, you can pay off your debt and close some of your credit lines that severely hurt your credit score.

8. Consider a credit builder loan

Another option is getting a credit builder loan. It’s a small loan that you pay first, then the lender puts the money in a savings account. The lender reports your payments to the credit bureau, helping you increase your credit score.

At the end of the loan term, you’ll get your money back, less the interest and administration fees.

Wrapping Up

We all make financial mistakes, but it’s never too late to recover, increase your credit, and get your dream home. With a 500 credit score, you might think it’s impossible. Fortunately, you have some options, such as FHA loans.

While you can get a home loan with a credit score of 500, it’s still better to improve your credit score first. That way, you’ll avoid high-interest rates and low chances of approval. You also get access to more mortgage lenders and better deals.

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