A 550 Credit Score Makes You a Subprime Borrower
Reader question: "I have a credit score of 550 right now. This is based on the information I got from Equifax. Is this good enough to get approved for a mortgage loan, or am I out of luck? A friend told me there were special loans for people in my situation, but he couldn't give me any specifics."
There used to be special mortgage loans for people with low credit scores. They were called subprime mortgages. But then we had this little hiccup that's now referred to as the housing crisis, and it was followed by a full-scale economic recession.
So you would be hard-pressed to find a lender willing to make a subprime loan these days. No one in the secondary mortgage market will buy them, so lenders aren't willing to make them.
As a result, you will have a hard time getting approved for a loan with a credit score of 550. I won't sugarcoat it. That's the reality of the situation. But that certainly doesn't mean you're powerless.
With a persistent effort over the next few months, you could probably push your score into the 640-and-up range. And that will make it a lot easier to get approved for a mortgage. You'll also qualify for a better interest rate on the loan. So you have two things to motivate you along the way.
Subprime Mortgage Defined
Let's back up for a minute. With a 550 credit score, you will be considered a subprime borrower by most lenders. There is no exact definition for this term. But a subprime mortgage is usually defined as a home loan given to a borrower with a FICO credit score below 640. So you would fall into this category, based on your current score.
As you probably know from watching the news, subprime loans were a big factor in the mortgage / housing meltdown that started in 2008. So these kinds of loans are hard to come by these days. As a result, it will be much harder to get a mortgage with a FICO score of 550 or lower.
FHA Loans for Bad-Credit Borrowers
You would probably have a better chance of getting an FHA home loan, as compared to a conventional loan. A conventional mortgage loan is made entirely in the private sector, with no government backing whatsoever.
An FHA loan, on the other hand, is insured by the federal government. Because of this government-backing, lenders are more willing to work with borrowers with low credit scores. This is one of the reasons why government-backed loans are so popular right now. For a lot of home buyers, it's their only option.
But even with an FHA loan, a 550 credit score is going to create obstacles. The Federal Housing Administration allows FICO scores of 500 or higher. But the lenders who actually make these loans may require a higher score. This is referred to as an overlay, and you can learn more about it in this article.
If you choose to go the FHA route, you should know that the Federal Housing Administration recently changed the down-payment requirement for borrowers with credit scores below 580. People in that range would have to make a down payment of 10 percent, compared to the lower 3.5-percent requirement for people with good credit. This change would apply to you, since you currently have a FICO credit score in the 550 range.
If I were in your position, I would rent for a while to take advantage of the low rental rates that are available right now. Then I would focus on two things: (1) saving up for a down payment and (2) improving my credit score as much as possible.
If you can do these two things, you'll have a much better chance of getting approved for a mortgage loan. Not only that, but you'll also qualify for a lower interest rate, which can save you a lot of money over the life of the loan. It's definitely something to consider.
Other Factors Besides Your Credit Score
Lastly, you should keep in mind that your FICO score is not the only thing considered by lender. It's definitely an important factor, but there are others as well. How much debt do you have right now, relative to your monthly income? That's something else mortgage lenders will want to know. It's important to look at the big picture.
This article answers the question: Can I get a mortgage loan with a 550 credit score these days? If you want to learn more about this topic, just do a keyword search at the top of the page. There are hundreds of articles on this website, and you can find them quickly by using the search tool.Yes, it can hurt your credit score.