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.
FHA Guaranteed Loan
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 the most FHA will let you borrow for the area in which you plan to buy your home. Go to the search page for FHA Mortgage Limits. Use the pull-down menu to select the state and then 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.
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." 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.
Make a down payment equal to 10 percent of the value, or price, of the home you have found to buy. Since your credit score is 550, FHA will not insure a loan of more than 90 percent of the home’s price.
USDA Guaranteed Loan
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.
Find a home in a location that qualifies as rural. Go to the U.S. Department of Agriculture Income and Property Eligibility Site. 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.
Verify that you are income eligible. Choose 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.
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." 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.
- 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: HUD FHA Lender List
- HUD.gov: HUD 4155.1: Chapter 4, Section F -- Borrower Qualifying Ratios
- U.S. Department of Agriculture: Rural Development: Guaranteed Rural Housing Loan Program -- Underwriting Guidelines
- U.S. Department of Agriculture: Rural Development: Eligibility
- National Association of Counties: City-County Search
- Realtor.com: Improve Your Credit Score Fast Using Rapid Rescoring
- U.S. Department of Agriculture: Rural Development: Guaranteed Housing Loans
- Realtor.com: Home Affordability Calculator
- Comstock/Comstock/Getty Images