Can I Get an FHA Loan With a 500 Credit Score? What You Need To Know

Getting approved for a mortgage can be challenging, especially if you have less-than-perfect credit. If your credit score is around 500, qualifying for a conventional loan will likely be difficult. But there may be another option – Federal Housing Administration (FHA) loans. These government-backed mortgages are more lenient when it comes to credit requirements, making homeownership possible for borrowers with lower scores.

In this article, we’ll explain everything you need to know about getting an FHA loan with a 500 credit score. We’ll cover:

• What is an FHA loan and how do they work?
• What are the credit score requirements for FHA loans?
• Is it possible to get an FHA loan with a 500 credit score?
• How can you improve your chances of approval with a low score?
• Tips for raising your credit score over time

Let’s get started!

What Are FHA Loans and How Do They Work?

FHA loans are mortgage loans insured by the Federal Housing Administration, a part of the U.S. Department of Housing and Urban Development (HUD). These loans are provided by FHA-approved lenders like banks and credit unions.

Some key features of FHA loans

• Require a lower minimum credit score than conventional mortgages
• Allow higher debt-to-income ratios
• Offer low down payments, as little as 3.5%
• Limited closing costs and lender fees

The FHA insures lenders against losses allowing them to offer mortgages to borrowers who may not qualify for conventional loans. This makes homebuying more accessible.

Now let’s look at the credit score requirements

What Is the Minimum FHA Credit Score?

The FHA itself does not have a hard cutoff for minimum credit scores. However, most lenders prefer scores of at least 580 to qualify for the lowest down payment of 3.5%.

Here are the general FHA credit score guidelines:

• 580+ – 3.5% down payment
• 500-579 – 10% down payment required
• Below 500 – Generally ineligible, but exceptions possible

So FHA loans are possible with a 500 credit score, but you’ll likely need at least 10% down and may face stricter requirements. Underwriting is done on a case-by-case basis, so approval is not guaranteed.

Is It Possible to Get an FHA Loan With a 500 Credit Score?

Yes, it is possible in some cases. The FHA does not outright deny borrowers with scores below 580. They leave it up to the discretion of lenders.

Some lenders may approve FHA loans for applicants with 500 credit scores, especially if they have strong compensating factors like:

• Low debt-to-income ratio
• Significant cash reserves
• Large down payment (over 10%)
• Strong employment history

However, the interest rate and overall costs are likely to be higher compared to those with better scores. The lender may require you to complete credit counseling as well.

It’s important to shop around with several lenders if your score is borderline. Ask about their specific underwriting policies for low credit scores. Some may be more flexible than others.

Tips for Improving Your Chances with a Low Credit Score

If your score is right around 500, here are some tips that can help boost your approval odds for an FHA loan:

• Make a larger down payment – Putting down 20% or more shows the lender you’re financially committed.

• Lower your DTI – Keep monthly debts minimal so more of your income can cover the mortgage payment.

• Explain credit problems – Provide documentation explaining any issues, and proof they were temporary setbacks.

• Highlight other strengths – Like retirement savings, strong income, home equity, or recent credit score improvement.

While getting approved with a 500 credit score isn’t easy, it is possible with the right lender if you have compelling reasons to offset the higher risk.

How to Raise Your Credit Score Over Time

The higher your credit score, the better your chances of getting approved and securing favorable mortgage rates and terms.

Here are some tips for improving your credit score over time:

• Pay all bills on time – Payment history is the biggest factor in your scores.

• Keep balances low – High utilization hurts, so aim for less than 30% on cards.

• Limit new credit – Too many new accounts can lower scores temporarily.

• Correct errors – Dispute any mistakes on your credit reports.

• Monitor your credit – Check reports regularly so you can address issues quickly.

With prudent financial habits, you can gradually boost your credit and improve your loan prospects. Be patient as it takes time to rebuild credit.

The Bottom Line

While getting an FHA loan with a 500 credit score is challenging and limits your options, it may be possible with certain lenders if you meet their underwriting requirements. Improving your credit score before applying puts you in a much stronger position to get approved and secure better rates.

Hopefully this overview gives you a better understanding of FHA credit guidelines and how you may still qualify for home financing even with less than perfect credit. Check with lenders to see if an FHA loan could work for your situation. With prudent financial habits over time, you can build your credit and achieve affordable homeownership.

With a 500 credit score, the maximum loan amount you can get varies significantly based on the lender and loan type.