Can I Get Approved for an FHA Loan With a 500 Credit Score?

If you’ve been researching home loans, you’ve probably seen that the FHA loan credit score minimum is 500. That can sound promising, especially if your credit score isn’t the best. But if you’ve applied for a mortgage with a score in the low 500s, you may have run into a wall of denials. 

While the FHA loan credit score minimum really is 500, the reality is that getting approved with a score in the 500s can be tough. 

Discover what the FHA allows, why lenders may say no, and what you can do to achieve your dreams of homeownership. With a little patience and the right plan, you can raise your score and become a more appealing applicant for lenders. 

Can you get approved for an FHA loan with 500 credit score?

Federal Housing Authority guidelines allow lenders to approve FHA loan applicants with a 500 credit score or higher. What many consumers don’t realize is that lenders cannot be more flexible than FHA guidelines allow, but they can set higher requirements. 

For example, a lender couldn’t approve a borrower for an FHA loan if they have a score of 499. However, a lender could choose not to accept borrowers with a score of 500 and instead require a minimum of 580. 

A score of 580 is the more well-known threshold for FHA loans, and it’s what you need if you want to qualify for a 3.5% down payment. 

If you find a lender that will approve you for an FHA loan with a score under 580, you’ll have to put 10% down. If you are purchasing a house for $300,000, that means you would need a $30,000 down payment. 

What the FHA actually says about 500 credit scores

The FHA loan credit score minimum is 500. Therefore, a lender could issue an FHA loan to a borrower with a score of 500 or higher, provided they meet other FHA guidelines. For instance, borrowers in the 500-579 credit score bracket have to put at least 10% down. 

While a 500 score does qualify, you have to bring a lot more money to the table. Keep in mind that you’ll also have to cover closing costs, which can be around 2-5% of the purchase price. 

The FHA increases down payment requirements for borrowers with sub-580 credit scores because they present more risk. The FHA does not lend money directly, but it does insure FHA-eligible loans. Since lenders are the ones putting up the cash, they can (and often do) enforce stricter standards. 

Why most lenders set a higher minimum than the FHA does

Setting higher minimum credit score requirements is all about risk mitigation. Lenders are the ones taking on the loan. They could foreclose on a house if a borrower defaults, but the process is time-consuming and expensive. 

Additionally, if the borrower doesn’t keep up with the home, the lender may not be able to sell the property for enough to recoup their investment. 

Many lenders sell mortgages on the secondary market. They may have a tough time selling off your mortgage if you have a low credit score. The 10% down payment requirement helps offset some of this risk, but lenders retain the right to set stricter credit score minimums when it comes to FHA. 

What a 500 credit score approval looks like in practice

Imagine you find a lender to approve your FHA application with a 500 credit score. Here’s what the terms of that deal will probably look like. 

Down payment requirements at 500

You’ll have to put 10% on an FHA loan with a 500 credit score. Additionally, you’ll have to carry private mortgage insurance (PMI) unless you put at least 20% down. 

The good news is that you may be eligible for first-time homebuyer assistance programs if you’ve never owned a house before. These programs can help you cover closing costs and reduce your out-of-pocket expenses. 

What rates and terms to expect 

Market rates dictate the best interest rate you can qualify for on a mortgage. If you get approved for an FHA loan with a 500 credit score, your interest rate will be higher than the market rates. A difference of a couple of percentage points in interest can mean tens of thousands in extra payments over a 30-year loan. 

Taking some time to improve your score could lead to huge savings. While you work on your score, continue to save for a down payment as well. You want to have leftover cash after you cover expenses like the home inspection, down payment, and closing costs. 

Lenders that may work with a 500 score

To find lenders in your area, try conducting a search like “FHA loan with 500 credit score.” You may have to filter through some junk results before you find lenders that actually offer FHA mortgage options to borrowers with 500 credit scores. 

A local bank or credit union may be more flexible when it comes to the lending process. However, it may still be tough to find a mortgage company willing to take on the risk. 

What to do if you’re at 500 and want to buy soon

If you want to pursue an FHA loan with 500 credit score:

• Build a consistent payment history
• Reduce your outstanding balances
• Check your credit report for errors
• Add positive tradelines

Every positive move can help you build momentum and make yourself a more appealing applicant to lenders. There are no shortcuts to building strong credit, so focus on consistency. 

Conclusion

Do you need help improving your credit score so you can increase your FHA mortgage approval odds? Kikoff is a credit-building platform with several tools and features meant to boost your score, such as verified rent reporting, free debt dispute tools, and more. 

Take a step toward stronger credit habits with Kikoff.