A credit score of 550 tells banks you are a high-risk borrower, but it does not necessarily render you untouchable. The Federal Housing Administration and the U.S. Department of Agriculture back loans for prospective homeowners with less than attractive scores, such as 550, if they meet certain requirements. Since these programs cover losses if a borrower defaults, lenders are more willing to approve borrowers who otherwise could not qualify for a loan.
You may be eligible for an FHA and/or USDA home mortgage loan, even if your credit score is only 550, by applying for mortgages under these two programs.
Find FHA Lenders
Find a lender in your area approved for FHA loans. Go to the U.S. Housing and Urban Development Lender List page on the HUD.gov website. Enter the city and state or zip code and click “Search” to find a list of approved lenders and contact information. Ask the lender about its credit requirements, as some lenders may decline your application if your credit score is 550.
Determine Your FHA Loan Limit
FHA loan limits vary, depending on the area in which you plan to buy your home. Go to the search page for FHA Mortgage Limits, and use the pull-down menu to select the state. Enter the county where you plan to buy your home. Click “Send.” The next page that comes up will show the limits available for FHA insured loans, based on the type of property -- single-family up to four-family dwelling.
Figure Your Anticipated Monthly Payment
To qualify for an FHA loan, your housing-expense-to-income ratio cannot exceed 31 percent of your monthly gross income and your long-term-debt-to-income ration cannot exceed 43 percent of your monthly gross income. The first ratio only takes into consideration the monthly mortgage payment. The second ratio includes the monthly mortgage payment as well as car, credit card and other debt payments.
Calculate how much home and monthly payment you can afford with a Home Affordability Calculator, such as the one from Realtor.com. Enter the required information, including your annual or monthly before-tax income and estimated mortgage interest rate, then click "Calculate."
Provide the Down Payment
Since your credit score is 550, FHA will not insure a loan of more than 90 percent of the home’s price. Make a down payment equal to 10 percent of the value, or price, of the home you have found to buy.
USDA Guaranteed Loans
Maintain a prompt payment history during the 12 months prior to when you anticipate applying for a USDA guaranteed loan; making late payments and having outstanding judgments or accounts referred to a collection agency or department will disqualify you. You also cannot have a foreclosure or discharged bankruptcy on your records within the prior three years. Pay off your taxes or other debts to the federal government.
Finding a USDA Home
Go to the U.S. Department of Agriculture Income and Property Eligibility Site to find a home in a location that qualifies as rural. Click on the Single Family Housing link under Property Eligibility. Enter the address of the home you wish to buy. You can also drag and zoom the map to the desired state and city or community; brown shaded areas shaded represent places that do not qualify for a Rural Development loan.
Determine Your USDA Home Eligibility
Verify that you are income-eligible by first choosing Single Family Housing under Income Eligibility on the Property Eligibility Site. Select the state in which the home is located from the pull-down menu and follow the prompts on the succeeding pages to enter the county, household information, expenses and monthly gross income. Click “Finish.” The next page will tell you whether you are eligible or ineligible for the Section 502 Guaranteed Rural Housing Loan.
Calculate Your USDA Payments
To qualify for a USDA loan, your mortgage payment cannot exceed 29 percent of your monthly gross income and your mortgage, car, credit card and other debt payments cannot exceed 41 percent of your monthly gross income. You are not required to make a down payment but doing so can lower these ratios since you will be applying for a smaller loan.
Figure what priced home and mortgage payment you can afford using Realtor.com's Home Affordability Calculator. Enter the required information, including your annual or monthly before-tax income and estimated mortgage interest rate, then click "Calculate."
Pull a free credit report from AnnualCreditReport.com. Look for any errors, such as accounts that you do not have or never opened, or outstanding accounts you have satisfied. Dispute the errors in writing to the credit reporting agency.
Ask your lender to run a Rapid Rescore if you think your score to be higher, such as having paid off a large amount of debt, and you wish to avoid waiting for the credit bureau to process the information. The lender will likely charge you a fee for this service.
If you have trouble meeting the debt-to-income ratios, reduce your credit card and other loan balances by paying above the minimum payments and not taking on new debt. Another option to find a less expensive home or increase the down payment.
- HUD.gov: HUD 4155.1: Chapter 4, Section A -- Borrower Eligibility Requirements
- HUD.gov: FHA Mortgage Limits
- HUD.gov: FHA Lenders
- HUD.gov: HUD 4155.1: Chapter 4, Section F -- Borrower Qualifying Ratios
- The Housing Assistance Council: USDA Guaranteed Rural Housing Loans (Section 502)
- National Association of Counties: City-County Search
- What is a Rapid Rescore? | Applying in 2020, Tips & How it Works
- U.S. Department of Agriculture: Single Family Housing Guaranteed Loan Program
- Realtor.com: Home Affordability Calculator
- Comstock/Comstock/Getty Images