Introduction
Getting a mortgage with a 500 credit score is challenging but not impossible. Lenders see low credit as high risk, leading to stricter requirements. However, some loan programs cater to borrowers with poor credit.
This guide covers strategies, loan options, and tips to secure a mortgage with a 500 credit score in 2025. We’ll explore government-backed loans, alternative lenders, and credit improvement techniques. Let’s help you achieve homeownership despite low credit.
Can You Get a Mortgage with a 500 Credit Score?
Yes, But with Limitations
Most conventional lenders require a minimum 620 credit score. However, FHA loans accept scores as low as 500 with a 10% down payment. Some subprime lenders also offer mortgages to high-risk borrowers.
Higher Interest Rates & Fees
A low credit score means higher interest rates and stricter terms. Lenders offset risk by charging more. Expect to pay 0.5% to 2% more than borrowers with good credit.
Larger Down Payment Required
A low credit score often requires a higher down payment (10% or more). This reduces the lender’s risk and improves approval chances. Saving for a bigger down payment is crucial.
Best Mortgage Loans for a 500 Credit Score (2025)
1. FHA Loans (Best for Low Credit Borrowers)
- Minimum Credit Score: 500 (with 10% down) or 580 (with 3.5% down).
- Down Payment: 3.5% to 10%.
- Pros: Low down payment, flexible credit requirements.
- Cons: Requires mortgage insurance (MIP).
2. VA Loans (For Veterans & Military)
- Minimum Credit Score: Varies (some lenders accept 500).
- Down Payment: 0% required.
- Pros: No down payment, no PMI.
- Cons: Only for eligible veterans and service members.
3. USDA Loans (For Rural Homebuyers)
- Minimum Credit Score: 580+ (some lenders may accept 500).
- Down Payment: 0% required.
- Pros: No down payment, low interest rates.
- Cons: Limited to rural areas.
4. Subprime & Non-QM Loans (Alternative Lenders)
- Minimum Credit Score: 500+ (varies by lender).
- Down Payment: 10% to 20%.
- Pros: Available for bad credit borrowers.
- Cons: High interest rates, strict terms.
How to Improve Approval Odds with a 500 Credit Score
1. Save for a Larger Down Payment
A 10% to 20% down payment reduces lender risk. It also lowers monthly payments and interest costs. The more you put down, the better your chances.
2. Reduce Debt-to-Income Ratio (DTI)
Lenders prefer a DTI below 43%. Pay down debts (credit cards, car loans) to improve your ratio. A lower DTI increases mortgage approval odds.
3. Get a Co-Signer or Joint Borrower
A co-signer with good credit (650+) strengthens your application. Their income and credit history compensate for your low score.
4. Show Stable Income & Employment
Lenders favor borrowers with 2+ years of steady income. Provide pay stubs, tax returns, and employment verification. A stable job history boosts approval chances.
5. Work with a Specialized Lender
Some lenders specialize in bad credit mortgages. They offer flexible underwriting but charge higher rates. Research and compare multiple lenders.
Steps to Apply for a Mortgage with a 500 Credit Score
Step 1: Check Your Credit Report
- Get a free credit report from AnnualCreditReport.com.
- Dispute errors (late payments, incorrect balances) to improve your score.
Step 2: Get Pre-Approved (If Possible)
- Some lenders offer pre-approval with a 500 score.
- Pre-approval shows sellers you’re a serious buyer.
Step 3: Compare Multiple Lenders
- Look for FHA, VA, USDA, or subprime lenders.
- Compare interest rates, fees, and down payment requirements.
Step 4: Gather Required Documents
- Proof of income (pay stubs, W-2s, tax returns).
- Bank statements (to show down payment funds).
- Employment verification (letter from employer).
Step 5: Submit Your Application
- Complete the lender’s mortgage application.
- Be prepared for additional documentation requests.
How to Improve Your 500 Credit Score Before Applying
1. Pay Bills on Time
- Payment history affects 35% of your credit score.
- Set up automatic payments to avoid late fees.
2. Lower Credit Card Balances
- Keep credit utilization below 30%.
- Pay down high balances to boost your score.
3. Avoid New Credit Inquiries
- Multiple hard inquiries lower your score.
- Wait 6-12 months before applying for new credit.
4. Become an Authorized User
- Ask a family member to add you to their high-limit, low-balance card.
- Their good credit habits can help your score.
5. Use a Credit-Builder Loan
- Some banks offer credit-builder loans.
- They report payments to credit bureaus, improving your score over time.
Pros & Cons of Getting a Mortgage with a 500 Credit Score
✅ Pros
- Homeownership is possible despite bad credit.
- Government-backed loans (FHA, VA, USDA) offer flexible terms.
- Refinancing later can lower rates if your credit improves.
❌ Cons
- Higher interest rates increase long-term costs.
- Stricter down payment requirements (10%+).
- Limited lender options compared to good credit borrowers.
Alternative Options If You Can’t Get a Mortgage
1. Rent-to-Own Agreements
- Rent with the option to buy later.
- Part of rent payments may go toward the purchase price.
2. Lease Purchase Programs
- Similar to rent-to-own but with a fixed purchase price.
- Gives time to improve credit before buying.
3. Fixer-Upper Homes with FHA 203(k) Loan
- Combines home purchase + renovation costs in one loan.
- May accept lower credit scores.
4. Wait & Improve Your Credit
- A 6-12 month credit repair plan can boost your score.
- Reapply when your score reaches 580 or higher.
Final Tips for Success
✔ Shop multiple lenders for the best rates.
✔ Avoid major credit changes before applying.
✔ Consider a co-signer if possible.
✔ Be prepared for higher costs (rates, fees, down payment).
Conclusion
Getting a mortgage with a 500 credit score is tough but achievable. FHA, VA, and subprime loans offer pathways to homeownership. Focus on saving for a down payment, reducing debt, and improving credit.
If denied, explore rent-to-own or credit repair options. With persistence, you can secure a mortgage and buy your dream home.