Yes, you can buy a house with a 600 credit score
Mortgage rules tightened after the housing crisis, making it tough to buy a home with low credit.
But lending requirements have loosened back up since then.
If you have steady income and employment, and are capable of making mortgage payments, a 600 credit score should not stop you from buying a house.
It all comes down to choosing the right mortgage program based on your credit, your income, and the home you’re buying.
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Qualifying for a mortgage with low credit
The good news is that a 600 credit score is high enough to buy a home.
In fact, there are several mortgage programs specifically tailored to help people with lower credit scores.
But this doesn’t mean everyone with a low score can qualify for a mortgage. You’ll have to meet other standards set by lenders, too.
- Lenders must verify your income and confirm your ability to afford a mortgage payment
- Typically, you must be employed for at least two consecutive years to qualify for a home loan. (Although there are some exceptions to the two-year job history rule)
- Your credit history must be good, too. This means no late payments or negative information reported to the credit bureaus within the past 12 months
- Your existing debt can’t be too high. To qualify for a mortgage, your total debts — including the home loan — typically need to be under 45% of your pre-tax income
If you meet these other criteria, a credit score in the 600 range shouldn’t stop you from buying a house.
You just have to choose the right mortgage loan.
Mortgage loans that allow a 600 credit score
Programs for borrowers buying a house with a 600 credit score include:
- FHA home loan — These are government loans insured by the Federal Housing Administration (FHA). FHA loans are intended for people with lower credit; they allow a minimum credit score between 500 and 580. If your score is below 580, you’ll need a 10% down payment. If it’s above 580, you only need to put 3.5% down
- VA home loan — VA home loans don’t have a minimum credit score requirement, so it’s possible to get this type of loan with a 600 credit score. Lenders set their own minimums, which typically range between 580 and 660. Eligible veterans and servicemembers can get a VA loan with no money down
- Non-Qualified (Non-QM) mortgages — Non-QM loans are for people who don’t fit inside the conventional loan box, but are still reliable borrowers. Non-QM loans are typically offered by banks that have the funds to set up and service their own unique mortgage programs. You can look for one on your own, or work with a mortgage broker who can recommend loan products that you’re likely to qualify for
- Conventional home loan — A conventional mortgage loan might be an option, too, but only when your credit score is a little higher. To qualify for conventional financing, you’ll need a minimum credit score of 620
How a 600 credit score affects your mortgage rate
It’s important to understand that buying a house with a lower credit score means you’ll have higher borrowing costs.
Those typically include a higher interest rate and monthly mortgage insurance.
However, the effect a 600 credit score will have on your mortgage rate varies by loan type. Here’s what you should know.
FHA mortgage rates and mortgage insurance
FHA mortgage rates are not directly tied to your credit score. So borrowers with 600 credit can often get a low rate using an FHA loan.
However, FHA loans also include mortgage insurance premium (MIP).
MIP is separate from your interest rate, but it’s paid monthly as a percentage of your loan amount. So it’s effectively like paying a higher interest rate.
Here’s an example of how that might look:
- FHA mortgage rate: 2.50%
- FHA annual mortgage insurance: 0.85%
- Effective interest rate: 3.35%
FHA loans also come with an upfront mortgage insurance fee equal to 1.75% of the loan amount.
This can be paid along with your closing costs. However, most people opt to roll the upfront fee into their loan amount so they don’t have to pay it out of pocket.
Conventional loan rates with low credit
With a conventional loan — unlike with an FHA loan — your mortgage rate is directly tied to your credit score.
That’s because conventional loans use “loan-level price adjustments” (LLPAs).
LLPAs are risk-based fees that lenders charge to borrowers with lower credit and/or smaller down payments. Instead of being paid upfront, LLPAs are typically paid via higher interest rates.
For example, say 30-year conventional rates are 3.00%.
- A borrower has 620 credit and a 5% down payment
- Their LLPA fee is 3.25% of the loan amount
- That’s equal to $9,750 on a $300,000 loan
- Instead of paying $9,750 out of pocket, most borrowers will cover the fee with a higher rate
- A 3.25% fee would likely raise rates by about 0.5% to 0.75%
- So instead of the 3.0% base rate, your mortgage rate could be as high as 3.75%
These fees are the reason many borrowers with lower credit — even those who might qualify for a conventional loan — opt for FHA loans instead.
However, there are benefits to conventional mortgages for those with credit of 620 or higher. A big one is the ability to remove mortgage insurance without refinancing.
Thus, a conventional loan might be cheaper in the long run if you plan to stay in the house for many years.
The right choice will vary by person, so it’s important to compare all your options before buying.
How to check your credit
It’s important to check your credit before applying for a mortgage — preferably six to 12 months before applying.
You’ll know where you stand credit-wise, and you can take steps to improve your score to get a lower mortgage rate and save thousands.
When checking your credit, make sure the information comes from a service that uses the FICO scoring model.
This is the same scoring model used by mortgage lenders. If you check your VantageScore — which is used by TransUnion — this credit score might be higher than the one a lender sees.
Services that use FICO scoring models include:
Should you improve your credit before buying a house?
You don’t need perfect credit to purchase a home.
But a higher score can make the approval process easier, and it can definitely save you money.
If you have a 600 credit score, bumping your score up to 620 (which is considered a “fair” score), can help you qualify for a conventional loan.
If you buy a property with less than a 20 percent down payment and pay private mortgage insurance, conventional lenders will remove this insurance once the property has a least 20 percent to 22 percent equity.
With an FHA and home loan, mortgage insurance typically lasts the duration of the loan. To remove it, you need to refinance — which comes with a second round of closing costs.
Bumping up your score can even help you qualify for a VA home loan if you’re eligible.
These loans also have lower costs. You don’t need a down payment with a VA home loan and they don’t require mortgage insurance.
Tips to boost a low credit score
A credit score of 720 or higher will typically put you in the “prime borrower” category — which gets you access to the ultra-low mortgage rates you see advertised.
If you have some time before you plan to buy a home, it’s worth trying to raise your credit score. Even a few-point difference can change the interest rates you’re offered.
The pace that you’re able to increase your score depends on many factors, such as the cause of a low score and your current standing.
But there are a few steps anyone can take to try to improve their score.
Pay bills on time
For example, always pay your bills on time. By doing so, your score will increase little by little each month.
But you need to prioritize your payments. Make your debt payments first, then utilities. Of course you should always pay your water and electricity bills, but missing these payments doesn’t affect your credit score like missing a payment on a credit card or auto loan.
The exception is when you have to use non-traditional credit to qualify (meaning you don’t have any credit history). Then your lender will check payments like utility bills and rent payments to qualify you.
Debt payment history makes up 35 percent of your credit score, and each timely payment results in positive activity reported to the credit bureaus.
Pay down existing debts
You can also pay down debt to increase your credit score.
The amount you owe makes up about 30 percent of your score. Therefore, keeping credit card balances below 30 percent of your credit limit can have a big impact.
Better yet, pay off your balances in full each month.
Improving your credit utilization ratio is one of the fastest ways to increase your credit score, possibly raising your score within a month.
Flag and remove errors
It’s also important to remove errors from your credit report. Negative items reported in error can lower your credit score, too.
Typically, you can get one free credit report per year.
This gives you more leverage to monitor your score and fix errors or red marks as soon as they appear.
Consider a rapid rescore
You can also talk to your mortgage lender about a process called rapid rescoring.
If you have proof of a credit report error, your lender can use this service to quickly update your credit report and improve your score within days.
Sometimes, rapid rescoring increases a credit score by 100 points or more. But the amount it will help you depends on the severity of errors on your credit report.
See if you qualify for a mortgage with 600 credit
To recap, a 600 credit score is high enough to qualify for a few different types of home loan.
But credit isn’t the only thing that matters.
Before approving you to buy a house, a lender also needs to verify your employment status, income, and debts.
So the best way to find out whether you can buy a house with 600 credit is to check in with a few lenders.
Applying with a lender is usually free, and it will give you a concrete idea of whether you qualify and how much home you can afford.
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Published at Tue, 29 Sep 2020 11:45:54 +0000