Do you think you should rely on an FHA loan since your FICO score is down to 500? Read the article and find out the reasons now!
If your financial condition is shaking or quivering, you need to find a government-backed mortgage. When your credit score is at 500, you have no other option than resorting to an FHA loan. The mortgage designed by the Federal Housing Administration brings two benefits, flexible guidelines and low down payment. Unfortunately, with a 500 mortgage credit score, you cannot make a down payment as low as 3.5%. Only if you work hard enough toward the score and earn 580, you can apply for this.
Nevertheless, 500 credit score home loans in Houston require a 10% down payment, which is relatively lower than the conventional loans. The traditional mortgages, on the other hand, require a 620 credit score and a 20% down payment. A large down payment is every lender’s choice, and it also keeps your application out of risk factors. Again, improving credit score is time-consuming; hence, a 20% down payment is not a part of the plan. Other things make this mortgage program seem perfect. So, let’s have a look at the main reasons for choosing the 500 credit FHA loans in Houston.
Flexible Eligibility Requirements
If you look at other mortgages, you can see how FHA loans have different qualification guidelines. The mortgage requirements are less stringent than other traditional house loans. The reason behind the flexible requirements is that a private lender receives insurance for issuing the FHA loan. When the borrowers face rejections for traditional financing, they are allowed for the FHA loan program. The mortgage, undoubtedly, is the last alternative for homebuyers who have had credit issues. Therefore, FHA loans make homeownership a reality for the borrowers with less-than-stellar credit.
There is a Catch, You should Remember
Going by the less restrictive guidelines, an FHA loan is the best thing that could ever happen to you. However, a borrower with a 500 score must pay for FHA mortgage insurance due to a 10% down payment. As a lender pays for private mortgage insurance when the borrower puts down less than 20%, FHA mortgage insurance is the same thing. If you choose a 30-year loan with a down payment of 10%, you might have to pay around 0.8% or more. Or, if you choose a 15-year mortgage with a 10% down payment, you might have to pay 0.45%. You can pay down the insurance with the closing costs or as a monthly payment. The upfront premium is typically 1.75% of the loan price. Therefore, a borrower would pay $1,750 against a $100,000 mortgage.
Low Credit Score is a Plus
When your credit score is too low for a conventional loan, you can be eligible for the FHA loan programs. The credit cutoff is unbelievably low in comparison to conventional house loans. However, you should work on your FICO score when unable to pay for the down payment. A 10% down payment is lower than what you see for traditional financing, but it can be massive for borrowers with 500 FICO scores. Generally speaking, lenders require a 600 FICO score for a down payment assistance program. Since a low credit score is a huge benefit, you should save for down payment.