Is It Possible to Buy a House With a 580 Credit Score?

Buying a home is an exciting milestone in life. However, for many people, less-than-perfect credit can make financing a home purchase seem out of reach. If you have a credit score of 580 or below, you may be wondering if homeownership is still possible. The good news is that there are options for purchasing a home with a low credit score like 580. Keep reading to learn more about credit score requirements, loan programs, and steps you can take to boost your chances of getting approved.

What Credit Score is Considered a 580 Score?

Before we talk about whether a 580 credit score is good enough for a mortgage, let’s talk about what that score means.

Your credit score is a three-digit number ranging from 300 to 850 that represents your creditworthiness The most commonly used credit scoring model is the FICO score According to FICO, a score of 580 to 669 is considered “fair” credit. It falls toward the lower end of that range, indicating some past issues managing credit or payments.

Lenders view borrowers with lower scores as higher risk. But that doesn’t necessarily mean a 580 credit score disqualifies you from a mortgage. You may just need to explore alternative loan options.

Is a 580 Credit Score Good Enough to Buy a House?

The short answer is yes, it is possible to buy a house with a 580 credit score in many cases. However, your options may be more limited compared to borrowers with higher scores.

Here are a few key points about financing a home with a 580 credit score:

• FHA loans allow scores as low as 500 – The Federal Housing Administration insures mortgages made by approved lenders. FHA loans only require a minimum credit score of 500, making them one of the most accessible mortgage programs for lower scores.

• You’ll pay a higher interest rate – The lower your credit score, the higher interest rate you can expect to pay on your mortgage. With a 580 score, you’ll likely pay 0.5 to 1 percentage point or more above what you’d pay with excellent credit.

• Your down payment may need to be higher – Lenders view borrowers with lower credit scores as higher risk. One way to offset that is by making a larger down payment, often 20% or more of the home’s purchase price.

• You might need a co-signer. Some lenders may need a co-signer with better credit to let you get a loan with a score of 580 or higher. A co-signer becomes equally responsible for repaying the mortgage.

• Loan approval isn’t guaranteed – While possible to qualify, approval is not guaranteed with a 580 credit score. Some lenders may still deny your application based on your full financial profile.

If you have a 580 credit score, you might still be able to get a mortgage, but it will depend on your income, assets, and current debts. The buyer may still be able to get a mortgage if they don’t have any other major red flags.

FHA Loans: The Best Option for Lower Credit Scores

As mentioned above, FHA loans provide one of the best opportunities for purchasing a home if your credit score is 580 or lower. Here are some key details about FHA mortgages:

• Minimum 580 score: FHA allows credit scores starting at 500, but many lenders require a minimum of 580 for the best terms.

• Low down payment options: You can qualify for an FHA loan with as little as 3.5% down. This makes it more feasible for those with lower savings to buy.

• Loans go up to $970,800: FHA loans have higher lending limits than conventional mortgages in expensive housing markets.

• Lenient debt-to-income ratio: FHA allows total debt up to 55% of gross monthly income, higher than conventional loans.

• No mortgage insurance penalty: FHA borrowers pay an upfront and annual mortgage insurance premium. But there is no penalty to remove PMI when you reach 20% equity as there is with conventional loans.

One trade-off is that FHA mortgages require an upfront mortgage insurance premium of 1.75% of the loan amount. This increases your closing costs. However, the benefits often outweigh the costs for buyers with fair or poor credit.

Steps to Improve Your Credit Score Before Applying for a Mortgage

You can buy a house with a credit score of 580, but the loan terms will be better if you raise your score first. Here are some tips for boosting your credit score quickly:

• Pay down balances: Keep credit card balances low, ideally below 30% of your credit limit. Pay off installment loans if you can.

• Dispute errors: Request your free credit reports and dispute any errors with the bureaus. Resolving mistakes can give your score an instant boost.

• Avoid new accounts: Don’t open new credit cards or loans before applying for a mortgage. Too many hard inquiries and new accounts can lower your score.

• Make on-time payments: Pay all bills on time, including utilities and cell phone bills. Payment history has a major impact on your score.

• Monitor your score: Check your credit score every few months leading up to your home purchase so you can address any issues.

With diligent credit management, it’s realistic to improve your score by 50 to 100 points or more within 6 to 12 months. A higher score will expand your mortgage options and make financing more affordable.

The Bottom Line

A credit score of 580 is considered fair and can make getting a mortgage more challenging. But it is possible with the right program and approach. An FHA loan provides the best opportunity for purchasing a home with a 580 credit score. You can expect to make a larger down payment and pay a higher interest rate compared to buyers with good or excellent credit. Improving your score before applying will open up more options. But even at a 580 level, homeownership can absolutely still be within reach with proper preparation.