Sometimes, looking for 580 credit score mortgage lenders makes perfect sense, like when you’ve found a $200,000 house for $150,000.
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Sometimes, even in such situations it does not make sense. Because, for many borrowers with 580 middle FICO score, a much better score is right around the corner.
The simple truth is that, the lower your credit scores, the higher your interest rate. The higher your interest rate, the less you can borrow. If at all possible, and usually it is quite possible, you should raise your credit scores before you apply for a mortgage loan.
Low Credit Score Mortgage Lenders
Finding 500 Credit Score Mortgage Lenders
On the face of it, it seems absurdly simple. You go to your computer and you search for low credit score lenders. And you find lots of results. Sorting through them, though, is going to be time-consuming.
What makes it difficult is the rules each lender has. The vast majority will propose an FHA loan (the next two common options are VA and USDA loans).
The FHA itself will insure mortgages for borrowers with scores as low as 500 or with no scores at all.
However, not all low credit score lenders go as low. Most stop at 580. Some at 600, some at 560.
If that is not enough, they add rules on top of FHA’s rules, called overlays. Not the same ones. Which means you need to learn a lot about overlays. And it’s not easy.
The best way to find lenders who work with borrowers with scores in the 500’s is to talk to a loan officer that works for a mortgage broker. Or a loan originator working for a mortgage broker. They have more options, which saves borrowers a lot of time. Not to mention that they already know the overlays of the lenders they work with.
What To Do When You Have Low Credit Scores
The best thing to do if you have low credit scores is to ask yourself if you have to get a mortgage fast.
Low credit scores are really expensive compared to average credit score loans, let alone good ones. And improving credit scores, for many, is not that difficult.
Especially if you have money to pay down some of your credit cards. But just making payments on time for a handful of months can bump a borrower into the next class.
Raising Credit Score Options
- Hire a credit repair company (some are good, some average, some are bad, so shopping around is required).
- Do it on your own.
- Talk to a loan officer. Some analyze your credit report and tell you what needs to be done, and you go do it. Some send you to a credit repair company they work with. If you trust the loan officer, you might feel okay working with their credit repair company…
Low Credit Scores to Decent Credit Scores in a Week
If your scores are low because you’ve been late (or not paid at all) a bunch of times, you have to wait to see your scores up again. However, if they are low, at least in part, because you carry too much debt in relation to the available credit, you can see them shoot up 50 or 60 points pretty fast.
Assuming you have cash to part with.
Because credit scores are determined, among other things, by the amount of debt in relation to available credit.
Which means that, if you can pay down some of your credit cards, you can have your scores go up fast. (If you pay for rapid re-scoring, you can have it done within 5-7 business days.)
Rapid re-scoring requires you have receipts to show you made the payments and the new balance.
Well, if your credit scores are really low, in the low 500’s, for instance, a 50 or 60 point jump will not get you decent scores.
But it will improve your chances of getting a loan: there are more lenders that lend if scores are 580 or higher than lenders that lend to 500-579.
If the 50 or 60 point jump gets your middle score to make it to 620, you have even more choices (because more lenders lend to 620 and higher than to 580-619).
It will improve the interest rate you get too… Not a lot, but mortgage loans come with this powerful tool: compound interest. (It’s a tool that favors lenders, but still a tool.)
So, over a long period of time, 0.25% of 1% ends up having real consequences.
Borrowing $200,000 (fixed-rate, amortized over 30 years) at 4.5% means that your monthly payment is $1013.37 and that, by the end of the 30 years, you’ve paid $164,813.20 in interest.
Borrowing it at $4.250% (same amortization, fixed) means that your monthly payment is $983.88 and that, by the end of 30 years, you’ve paid $154,196.80 in interest.
Which is good but not the main reason you should be taking this seriously. The reason you should be taking this seriously is this:
That small difference in monthly payments gets some people to not qualify. They end up not buying the house they want because of that small difference in monthly payments.
Sometimes, people err by making too much of a fuss over 0.25% interest rate difference; sometimes, they don’t making enough.
By that I mean, sometimes, people keep not buying a house (or refinancing one) because they want a rate that’s 0.25% lower and they wait, and wait, and wait, and rates go up, not down.
On the other hand, there are people who accept a rate a bit higher than they should because they think they’ll get a raise or another job, and that does not materialize (or materializes much later) and they end up struggling, paying late fees, and getting stressed.
On top of that, they don’t shop for a lender properly, but of that later.
Low Credit Score Mortgage Loans – The Big Problems
The biggest problem with looking for 580 credit score mortgage lenders (or580 or lower, that is), is that you limit yourself as far as the loan amount you can borrow goes, compared with what you could borrow if your FICO middle score were ‘normal.’
If your scores are under 640, conventional loans are not an option for you. Conventional loans do not have upfront mortgage insurance, like FHA loans do. Also, once you have 20% equity in your home, you can remove the mortgage insurance, no matter the term of your loan. With 30-year FHA loans, your mortgage insurance stays with you for as long as you have the loan.
Many lenders (most) require manual underwriting for low credit score loans. Manually underwritten loans have lower DTI (debt-to-income ratios) than the ones underwritten automatically. That means, you can get much smaller loans.
There are 2 DTI’s: front and back.
The front ratio compares your housing costs (monthly principal, interest, property insurance, mortgage insurance, property taxes and home owner’s association, if any) to your pre-tax monthly income.
For manually-underwritten loans, all those expenses cannot be more than 36.999% of your monthly income. Manual underwriting allows them to be as high as 46.999999%.
In other words, only $369.99 of every $1,000 of income can be taken up by housing expenses if manual underwriting is involved not $469.99.
The back ratio takes into account you all your debt payments (all housing payments plus the minimum payments you must make on any other loan – credit cards, car loan, etc.).
Manual underwriting limits this ratio too. Some lenders will only go as high as 41%. But the one you get when your credit scores are high enough for automatic underwriting is 55.9999%.
So, only $410 of every $1,000 of pre-tax income you have can go towards your debts, compared to $560.
In practice, that means that you can buy tens of thousands of dollars more house with ok credit than you can with bad credit. Usually, tens of thousand of dollars means either a much bigger property or a property in much better condition.
The alternative to FHA (or other Government-backed programs) is non-QM lenders. Many lenders do not offer non-QM loans. Those that do, have much higher interest rates on this loans than FHA or regular conventional mortgages, 7% or higher when regular conventional loans are at 4-4.5%.
Last, but not least, when manual underwriting comes into play, the minimum down payment amounts are higher.
So, do you really want to look for 580 credit score mortgage lenders or would you rather get your scores over 640 then look for lenders?