Can I get an Indiana mortgage with a 500 credit score? Maybe the question should be rephrased as “Are lenders doing loans for clients with a 500+ credit score?”. The short answer is Yes.

If you have a credit score between 500 and 580 and you are now overly excited about moving into your new home soon, you may want to click the <back> button right now!

For those of you still reading, the answer is MAYBE (that’s a BIG maybe). While some banks, loan officers, and real estate agents are claiming that the lending guidelines are relaxing, I see it as all sizzle and no steak.

My apologies to anyone who is pushing this program, but I just don’t think that it will help enough people who are going to get their hopes up about becoming home buyers around Northwest Indiana in the near future because of this.

Here are my reasons…

First, even though the banks and lenders would like you to think they are relaxing the requirements for a mortgage loan, they have to protect themselves. Period! Knowing that the delinquency rate for someone with a 500-550 score is a whopping 71%, do you think they will be willing to take that much risk without a way to off-set it?

Delinquency rate is defined as “the percentage of borrowers who reach 90 days past due or worse (such as bankruptcy or account charge-off) on any credit account over a two-year period”. *

Second, knowing that risk = rate, expect the interest rates to be above that of a standard FHA loan. You can read my previous post, but understand that for every 1% that the rate increases, you will lose 10% of your buying power. For example, a particular monthly payment may buy you a $200,000 home at 5%, but only a $180,000 home at 6%.

Third, because of increased risk, expect the minimum downpayment to be greater. On a standard FHA loan, the minimum is now 3.5%, versus 10% for a borrower with a sub 580 score. This, in and of itself, could exclude a large number of buyers who will need to have a large amount of (sourced and seasoned) cash available from their own pockets. Gifts from family members are not allowed for these programs.

Forth, the buyer will be required to have at least 2 months of PITI (principle, interest, taxes, and insurance) funds in reserve. In other words, if you were to purchase a $150,000 home, you would need over $17,000 cash in hand, even if the seller was paying all your closing costs (which are capped at 3%). My suggestion would be to use that cash to deal with any credit issues you may have so that you will qualify for a standard loan. The issues are not just going to go away if you ignore them.

Fifth, the debt to income ratio is lower in this program. With a traditional FHA loan, your current debts that show up on your credit report (plus child support and/or alimony) combined with your PITI payment versus your income could be a ratio of 45% (or more depending…). That ratio is now at about 36%. You will have to have a greater income to afford the same home now. Doing some simple math, if you pay $1,000 a month for your mortgage, $300 for an auto, and $100 a month in credit cards and/or school loans, etc., you will need to gross over $46,000 a year to qualify.

Sixth, You will still have to meet the “other” FHA requirements such as time since discharge of bankruptcy, time since foreclosure, maximum number of late payments in the last 12 months, minimum number of tradelines, etc.

Here’s my point – I suspect very few Indiana borrowers will fit the criteria for this program, but some will. If they have the required tradelines, no bankruptcies or foreclosures, no late payments (as well as charge-offs, non-medical collections, repossessions, etc.), their score will likely be above 600 and maybe even 640. They will then more-than-likely qualify for a traditional FHA loan. If not, there are still other options!

How can I help you get into your first or next home?

Scott

Your Indiana mortgage expert specializing in FHA, VA, and USDA Rural Development loans.

Need cash to buy or refinance a home and make repairs or improvements? Ask about our FHA 203(k) Rehab loans.

* Delinquency graph and definition courtesy of TransUnion.