A 500 middle score is enough for FHA, the Federal Housing Administration program that insures loans for buyers with damaged credit. Your middle score is the middle of the three scores from Equifax, Experian and TransUnion, and it's the number the lender goes by. HUD puts every score from 500 through 579 in one tier, so a 500 and a 575 face the same 10% down payment.
What changes below 580
Four things are different for a buyer under 580:
- The down payment. FHA finances up to 90% of the price instead of 96.5%, so the buyer brings 10%. Every dollar of it can be a gift from a family member.
- No FHA 100% financing. Down payment assistance seconds start at a 580 score, so below that line the 10% comes from savings or a gift.
- Tighter ratios on a manual review. Many loans in this range are approved by an underwriter reviewing the loan by hand, called manual underwriting. HUD caps those loans at 31% of gross monthly income for the house payment and 43% for all debts combined, and below 580 no compensating factor raises the cap.
- Fewer lenders. Many lenders set their own floor at 580 or 620. As a mortgage broker, we shop multiple wholesale lenders, including ones that approve FHA below 580.
A $275,000 home at a 560 score and at 580
Here is a single-family home in Volusia County at a 5.75% rate on a 30-year fixed, with property taxes at 0.85% of the price and homeowners insurance at $230 a month. FHA's mortgage insurance premium (MIP) is 1.75% upfront, added to the loan, plus an annual premium billed monthly.
| 560 score | 580 score | |
|---|---|---|
| Down payment | $27,500 (10%) | $9,625 (3.5%) |
| Base loan | $247,500 | $265,375 |
| Upfront MIP (1.75%, financed) | $4,331.25 | $4,644.06 |
| Total loan | $251,831.25 | $270,019.06 |
| Principal and interest | $1,469.62 | $1,575.76 |
| Monthly MIP | $103.13 (0.50% a year) | $121.63 (0.55% a year) |
| Taxes and insurance | $424.79 | $424.79 |
| Total payment | $1,997.54 | $2,122.18 |
The 560 buyer brings $17,875 more cash and pays $124.64 a month less, since less is borrowed. On a manual review, keeping that payment at 31% of income takes gross income of $1,997.54 divided by 0.31, or $6,443.68 a month. A buyer earning $6,500 lands at 30.7%, and the 43% total cap leaves $797.46 a month for a car payment and card minimums.
Getting from the 500s to 580
Card balances are usually the quickest lever. Amounts owed make up about 30% of a FICO score, and the share of your card limits in use, called credit utilization, is a big part of that. Picture a buyer with two cards: $1,900 owed on a $2,000 limit and $850 on a $1,000 limit. That's $2,750 of $3,000, or 91.7% utilization. Paying $2,150 brings the total to $600, which is 20%.
Once those payments post, a rapid rescore puts the new balances on your credit report in days instead of waiting for each card company's monthly report. If high balances are what's holding the score under 580, $2,150 spent on the cards can save $17,875 of down payment on this home.
Payment history carries 35% of the score, so every bill paid on time from here on helps. Check all three reports for accounts that aren't yours or paid balances still showing as owed, and dispute those errors before you apply. Hold off on new cards and loans, because each new account shortens the average age of your credit.
Program by program at 500
- FHA: Approved from 500 to 579 with 10% down, and from 580 with 3.5% down.
- VA: VA sets no minimum score of its own, and AAA Capital Funding does VA loans from a 500 score, with $0 down for eligible veterans, service members and surviving spouses.
- USDA: USDA's handbook sets no minimum, but most lenders want about 640 for USDA's automated approval.
- Conventional: Starts at 620.
Covering the 10%
Family can give the whole amount with a signed gift letter and bank records showing the money moving from their account to yours. The seller can't pay the down payment, though FHA lets the seller cover up to 6% of the price in closing costs, as much as $16,500 here. A co-signer adds income to the ratios, which helps when the payment is the gap, while your own score still has to clear 500.
Run the cash to close calculator on the price you want and see what closing takes. Then call AAA Capital Funding at 888-601-8344. We'll pull your three scores, tell you how many points stand between you and 580, and point to the balances worth paying first.