Making homeownership possible with bad credit home loans
The range of home loans for bad credit available today often surprises buyers.
Many lenders will issue government-backed FHA and VA loans to borrowers with credit scores starting at 580. Some lenders even offer FHA loans with a credit score as low as 500, though this is far less common.
With a credit score above 600, your options open up even more. Conventional mortgages require only a 620 score to qualify. And with a credit score of 680 or higher, you could apply for just about any home loan.Verify your home loan eligibility. Start here
In this article (Skip to...)
- Lowest score to buy
- What is bad credit?
- Bad credit home loans
- Bad credit mortgage lenders
- Tips to buy with bad credit
- Tips to improve your credit
Can I get a home loan with bad credit?
Getting approved for a home loan with bad credit is challenging, but it’s not impossible.Check your home loan options. Start here
Across the industry, the lowest possible credit score to get a mortgage loan is 500. However, it’s important to note that mortgage lenders willing to accommodate such low scores are few and far between.
Additionally, these lenders usually charge higher interest rates to offset the risk associated with lending to borrowers with poor credit histories.
Are there home loans for bad credit?
Yes, there are home loans for bad credit, designed specifically to help borrowers with less-than-perfect credit scores get into a home. The most common type of home loan for those with bad credit is an FHA loan, backed by the Federal Housing Administration.Check your home loan options. Start here
While the FHA technically allows for FICO scores between 500 and 579 with a 10% down payment, most FHA-approved lenders prefer applicants with a higher FICO score of at least 580, coupled with a lower 3.5% down payment. This is because higher credit scores generally pose less risk to the lender, making the loan easier to approve and often with better terms.
Beyond FHA loans, there are also bad credit mortgages offered through private lenders as part of “non-qualified mortgage” (non-QM) programs. These programs often have laxer requirements and are not backed by any government agency.
Non-QM programs can accommodate credit scores as low as 500, but it’s essential to understand that the interest rates on these types of bad credit home loans are typically much higher than those on conforming and government-backed loans. Therefore, if you can meet the criteria for standard home loan programs like FHA loans, they are generally a more financially sound choice.
What do mortgage lenders consider a bad credit score?
The definition of a bad credit score varies between mortgage lenders. But, as a rule of thumb, the FICO scoring model considers scores below 580 to be “poor” or “bad.” If you’re looking for a mortgage with a credit score below 620, it may be considered a “low credit mortgage.”Verify your home loan eligibility. Start here
FICO credit score ranges:
- Below 580: Bad credit
- 580 to 669: Fair credit
- 670 to 739: Good credit
- 740 or above: Excellent credit
Still, some home buyers can qualify for a home loan with a FICO score as low as 500, depending on the loan program.
How to buy a house with bad credit
Some mortgage programs are specifically designed to help low-credit applicants buy homes.Verify your home loan eligibility. Start here
The FHA loan program is commonly known as a bad credit home loan because it allows FICO scores to start as low as 500–580. But it’s not the only mortgage program for borrowers with lower FICO scores.
|Minimum Credit Score
|500 (10% down)580 (3.5% down)
|3% to 10%
|Home Possible loan
|down payment varies
The right loan program for you depends not just on your credit score but also on your credit history, income, employment, and savings. Your loan officer will help you compare these options and determine which bad credit home loan is the best option for you.
Home loans for bad credit: 7 mortgage options
These seven home loans for bad credit are designed to help low-score borrowers achieve their homeownership goals. Requirements and credit score minimums vary by program.Verify your home loan eligibility. Start here
The best mortgage for you will provide flexible qualification guidelines and allow you to comfortably afford your monthly mortgage payments. Carefully compare loan terms and interest rates with your loan officer to decide which of these programs works best for your situation.
1. FHA loan: 500 credit score
FHA loans (mortgages backed by the Federal Housing Administration) have the lowest credit score requirements of any major home loan program. Most lenders offer FHA loans starting at a 580 credit score. If your score is 580 or higher, you can put only 3.5% down.
Those with lower credit scores (500–579) may still qualify for an FHA loan. But they’d need to put at least 10% down, and it’s more difficult to find a willing lender.
Another appealing quality of these home loans for bad credit is that, unlike conventional loans, FHA-backed mortgages don’t carry risk-based pricing. This is also known as “loan-level pricing adjustments” (LLPAs). Risk-based pricing is a fee assessed on loan applications with lower credit scores or other less-than-ideal traits.
There may be some interest rate “hits” for lower-credit FHA borrowers, but they tend to be significantly less than the rate increases on conventional loans. For FHA-backed loans, poor credit scores don’t necessarily require higher interest rates.
Keep in mind, though, that FHA requires both an upfront and annual mortgage insurance premium (MIP), which will add to the overall cost of your loan.
2. VA loan: 580 credit score
VA loans are popular mortgage loans offered only to veterans, service members, and some eligible spouses and military-affiliated borrowers. With backing from the Department of Veterans Affairs, these home loans for bad credit do not require a down payment or any ongoing mortgage insurance payments. (Although there is a one-time funding fee, most borrowers roll into the loan amount.)Verify your VA loan eligibility. Start here
VA loans also typically have the lowest interest rates on the market.
Technically, there’s no minimum credit score requirement for a VA loan. However, most lenders impose a minimum score of at least 580. And many start at 620.
Similar to FHA loans, VA loans don’t have risk-based pricing adjustments. Applicants with low scores can often get rates similar to those for high-credit borrowers.
3. USDA loan: 640 credit score
USDA loans are popular for their zero-down payment requirement and low rates. You typically need a 640 FICO score to qualify for this type of mortgage, though minimum credit score requirements can vary by lender.Verify your USDA loan eligibility. Start here
The U.S. Department of Agriculture is backing these mortgages to increase homeownership in rural areas. To submit a mortgage application for this type of loan, the home you’re buying must be located in a qualifying rural area, though some suburbs make the cut.
A USDA loan also won’t work if you make too much money. Your household income can’t be more than 115 percent of the median household income in your area.
4. Conventional loan: 620 credit score
Non-government conventional mortgage loans charge higher interest rates and fees for borrowers with low credit scores.Verify your conventional loan eligibility. Start here
Fannie Mae and Freddie Mac, the agencies that administer most of the conventional loans in the U.S., charge loan-level price adjustments, or LLPAs. These fees are based on two loan factors:
- Credit score
- Loan-to-value ratio (LTV): LTV is the ratio between your loan amount and the home’s appraised value. Your LTV ratio would be 90% if you planned to put down $40,000 on a $400,000 house while borrowing $360,000 for your mortgage.
As your LTV rises and your credit score falls, your fee goes up. For instance, a borrower with 20% down and a 700 credit score will pay 1.25% of the loan amount in LLPAs. But an applicant with a 640 score and 10% down will be charged a fee of 2.75 percent.
These fees translate to higher interest rates for borrowers. That means lower-credit-score applicants will have higher monthly mortgage payments and will pay more interest over the life of the loan.
The majority of lenders require homeowners to have a minimum credit score of 620 for a conventional loan. But while that threshold is pretty low, the additional fees charged for poor credit often mean FHA loans are more affordable for bad-credit borrowers.
5. Fannie Mae HomeReady: 620 credit score
Released in December 2015, HomeReady is an important Fannie Mae loan program for low- to moderate-income borrowers, with expanded eligibility for financing homes in low-income communities.
HomeReady requires only 3% down and a 620 credit score for fixed-rate loans. And the rates it charges for private mortgage insurance (PMI) are cheaper than for standard conventional loans. Unlike Freddie’s Home Possible program, you don’t have to be a first-time homebuyer to qualify for HomeReady.Verify your HomeReady eligibility. Start here
6. Freddie Mac Home Possible: 660 credit score
Freddie Mac’s first-time home buyer program, Home Possible, can help buyers get into homes with a very low down payment and moderate credit.
Home Possible is available for low- and moderate-income borrowers with a down payment of just 3 percent. And, for borrowers who can’t save up the down payment, Home Possible offers a variety of down payment assistance programs.
To qualify for the Home Possible fixed-rate loan with reduced PMI rates, most lenders will require a 660 or better credit score.Verify your Home Possible eligibility. Start here
7. Non-qualified mortgage (Non-QM): 500 credit score
The qualified mortgage rule, also known as the “QM Rule,” went into effect in 2014. The federal government set the QM Rule to create safer loans by prohibiting or limiting high-risk mortgage products. This rule is why most loans require a minimum credit score in the 600s, a down payment, and/or private mortgage insurance.
But there are still some “non-QM” loans available with more flexible rules. Banks don’t sell these mortgages to investors, so they’re free to set their own criteria, like lower minimum credit score requirements.
Some non-QM loans can be obtained with credit scores as low as 500. But like with an FHA loan, you’re much more likely to find a lender who will approve you with a FICO score of 580 or higher.
The downside is that non-QM loans usually have significantly higher rates than conforming mortgages. If your credit score is too low for a mainstream home loan, it might be worth waiting to buy until you can raise your credit score and lower your borrowing costs.
If you’re interested in a non-QM loan, check out the specialty mortgage programs some banks and credit unions offer that are neither conventional loans nor government-backed. Or, work with a mortgage broker who can recommend products from various lenders that might fit your needs.
Bad credit mortgage lenders
A less-than-perfect FICO score doesn’t mean you’re confined to dealing with subpar mortgage lenders. Surprisingly, some top-tier lenders specialize in assisting borrowers whose credit scores hover around or even dip below 600.
While it’s true that qualification may not be possible for everyone and your interest rate might be above what a “prime” mortgage borrower would receive, you have just as much right to seek out the best mortgage rates, fees, and customer service. Don’t let your credit score deter you from exploring all available options.
For comprehensive advice on finding the right lender for your situation, check out our guide to the best bad credit mortgage lenders. This resource lists the top lenders specifically catering to bad credit home loans, helping you make an informed decision that aligns with your needs.
How much will a bad credit score cost you?
Understanding the financial implications of a bad credit score can be eye-opening, especially when it comes to securing a mortgage.
Generally, the lower your credit score, the higher your interest rate will be, which directly affects both your monthly payments and the total amount of interest you’ll pay over the life of the loan.Check your home loan options. Start here
For illustration, let’s consider a 30-year fixed-rate mortgage of $300,000 with a 20% down payment ($60,000). Below is a comparison table showcasing different FICO score ranges and their theoretical interest rates, along with the corresponding monthly mortgage payment and total interest paid over 30 years.
|Monthly mortgage payment
|Total interest paid
Note: These are hypothetical rates and payments for illustration purposes. Actual rates can vary based on a variety of factors including lender policies, market conditions, and economic indicators.
As evident from the table, an “Excellent” FICO score range of 800-850 could secure an interest rate of 6.5%, leading to a monthly mortgage payment of $1,514 and a total interest payment of $245,032 over 30 years.
On the other end of the spectrum, a “Bad” credit score between 300-579 could land an interest rate of 8.5%, resulting in a monthly payment of $1,845 and an astronomical total interest payment of $364,813 over the life of the loan.
The difference between the “Excellent” and “Bad” categories in this example is a staggering $119,781 in total interest paid over 30 years. Thus, it’s clear that a low credit score can be incredibly costly when it comes to long-term home financing.
How to improve your chances of getting a home loan for bad credit
A bad credit score can limit your home loan options and make it harder to qualify. To improve your chances of getting approved with bad credit, you can strengthen other aspects of your loan application. For example:Check your home loan options. Start here
- Reduce your DTI: Lenders will check your debt-to-income ratio, or DTI, to see whether you can afford your new mortgage payment. If you can pay down or pay off any existing debts before applying, it may be easier to qualify for a home loan
- Increase your down payment: Exceeding your loan’s down payment minimum will strengthen your loan application because you’re putting more of your own money on the line
- Improve your cash flow: When you can show your lender a steady flow of income for the past two or more years — either through W-2 forms or tax returns — your application may seem less risky to underwriters. A healthy balance in your savings account looks good, too
- Look at more affordable homes: Finding a home you can comfortably afford instead of one that would stretch your finances every month, can help your approval odds. In a few years, once you’ve built some home equity and a stronger credit profile, you can upgrade
In short, mortgage underwriters will look at your full financial life — not just your credit score — when you apply for a home loan. If your credit is low but the rest of your financial picture looks good, you’re more likely to get approved.
A backup plan: Fix your credit and then refinance
If you find problems in your credit history after applying for a mortgage loan, it may be too late to increase your credit score. If you continue the home-buying process, expect a higher monthly payment, especially on a conventional loan.
But you can buy now and then refinance later on once your credit score improves. Refinancing could replace your existing mortgage with a new one that has a lower rate and better terms, once your finances look better.
Option for buyers who can’t get a bad credit home loan
The most suitable home loans for bad credit are often determined by the severity of the low credit score. If a credit score falls below 600, FHA or VA loans may present themselves as feasible alternatives.Check your home loans for bad credit options. Start here
However, the most prudent approach involves taking steps to improve the credit score before even thinking about filling out a mortgage application. Although this advice may not be immediately welcomed, it offers long-term benefits, such as significant savings via lower interest rates. Additionally, a better credit score can open up a broader range of mortgage choices, often accompanied by more lenient income requirements and smaller down payments.
For those who find it unlikely to qualify for a mortgage due to bad credit, there are other avenues worth exploring.
Consider a co-signer
If you’re finding it challenging to qualify for a mortgage due to a low credit score, you might want to consider bringing a co-signer into the equation. A co-signer essentially vouches for you, making lenders more comfortable with extending credit your way. In essence, you’re leveraging another person’s higher credit score and financial stability to boost your chances of securing that loan.
That said, it’s crucial to understand the responsibilities and implications for both parties involved. The co-signer’s credit score will be affected, for better or worse, by the loan’s performance. Lenders might also average your credit scores, depending on their specific policies, which can make the loan more attainable. Nevertheless, your interest rates will often be based on the lower of the two scores, meaning you may pay a bit more over the life of the loan.
Negotiate the deletion of collections
Collections accounts can be like a lingering dark cloud over your financial landscape. These entries can persist on your credit reports for years, casting a long shadow even after they’ve been paid off. While paying off a collection will upgrade its status to “Paid,” which is better than an unresolved debt, it still doesn’t make it disappear from your report.
The real game-changer would be negotiating for its complete removal, usually referred to as “Pay for Delete.” To do this, contact the collection agency and offer to pay off the debt under the condition that they remove the entry from your credit report. Always get this agreement in writing before you make any payments. This way, it’s as if that financial mishap never happened, significantly boosting your credit score.
Boost your credit limit
Improving your credit score can be a bit of a marathon, but one way to give it a little sprint is by boosting your available credit. You can either pay down your current balances to lower your credit utilization ratio, or directly request a credit limit increase from your card issuer. Either way, a higher credit limit can improve your credit score by reducing your overall credit utilization rate, which is a key factor in credit scoring algorithms.
However, it’s worth noting that when you request a credit limit increase, you need to check if your credit card company will perform a hard or soft inquiry on your credit report. Most companies opt for a soft inquiry, which won’t impact your score. So, not only does a higher credit limit help you, but if done smartly, it won’t harm your ongoing credit repair efforts either.
Avoid unnecessary hard pulls
First things first: not all credit checks are detrimental to your credit score. Soft inquiries, such as those conducted for background checks, don’t affect your score. However, hard inquiries, like the ones made when you apply for a new credit card or a loan, can ding your score a bit. Each hard pull can reduce your credit score by a few points, and while it’s not a massive impact, they can add up quickly if you’re not careful.
Be extra vigilant when you’re in the market for financial products or services. Always check whether the creditor will be performing a hard or soft pull on your credit report. Knowing this can help you decide if it’s the right time to proceed, especially if you’re considering a significant financial decision like applying for a mortgage in the near future.
Tips to improve your credit before applying for a bad credit mortgage loan
Bad credit doesn’t necessarily mean you won’t qualify for a mortgage. But borrowers with good to excellent credit have the most loan options. They also benefit from lower rates and fees.Check your home loan options. Start here
If you can polish up your credit report before shopping for a mortgage, you’re more likely to qualify for the best loan terms and lowest interest rates. Here are a few tips to improve your credit report and score before applying:
- Lower your credit utilization ratio: Paying down your credit cards and personal loan balances lowers your credit utilization ratio, which lenders like to see. This also helps your debt-to-income ratio. Credit utilization is your credit card balance compared to your limit. Someone with a $10,000 credit limit across all cards and a $7,000 balance has a utilization ratio of 70%. This is too high. Pay down balances to 30% or less to see the biggest credit score improvement
- Improve your payment history: Late and missed payments will lower your FICO score. Be sure to make on-time payments on all your loans and credit cards. It’s a good idea to set your accounts on autopay.
- Check your credit report for accuracy: The three major credit bureaus (Experian, Equifax, and TransUnion) make mistakes sometimes. Your creditors can report inaccurate information to the credit bureaus, too. Monitor your credit history to notice errors before they lower your score. The government has set up a website where you can check your credit accounts free: annualcreditreport.com
- Dispute inaccurate information: If you do find inaccurate information in your credit history, be sure to file a dispute, especially if the errors include huge blemishes like foreclosures, repossessions, or collections accounts
- Remove yourself from co-borrowing accounts: If you’re a co-borrower or authorized user on someone else’s credit account and that account is maxed out or in default, it can drag your credit score down. Getting your name removed from such accounts is a quick way to raise your score
Removing inaccurate information can increase your credit score quickly. Developing better credit habits will take longer to produce results.
If you’re looking to buy or refinance and know you may need to bump your credit score, it can be helpful to call a loan advisor right now, even if you’re not sure you’d qualify.
Most lenders can run scenarios through their credit agency providers and see the most efficient and/or cost-effective ways to increase your scores. And this can be a much more effective route than going it alone.
FAQ: Home loans for bad credit
Bad credit is essentially a low credit score that can result from various factors such as late payments, defaults, or bankruptcies. In most cases, credit scores range from 300 to 850, with scores under 600 often considered as “bad” or “poor” credit. Having a low credit score can make it more challenging to secure a mortgage at favorable rates.
Different mortgage lenders will view your application differently, so it’s important to shop around when you have bad credit. Online mortgage lenders have opened up more choices for many low-credit-score borrowers. Make sure to work with someone who has a Nationwide Mortgage Licensing System (NMLS) license.
It is possible to find an FHA lender willing to approve a credit score as low as 500. You may also be able to find a non-QM (non-conforming) conventional lender with a 500 credit score minimum. But you won’t have many choices and must be prepared to make a larger down payment. It will also help if you have fewer other debts compared to your monthly income.
This is unlikely, as most lenders require a credit score in the 600s or higher for a home equity loan. You may find exceptions if you have a very low debt-to-income ratio (DTI) and lots of equity. A home equity loan is a second mortgage based on your home’s value.
The credit bureau Experian doesn’t use the term bad credit, but it does consider any score below 580 to be very poor credit. Average credit scores range from 580 to 669; good credit scores begin at 670. If your credit score falls below 580, you’ll notice fewer loan options are available. Many lenders consider FICO scores below 580 to be subprime territory.
Yes, having a cosigner can certainly assist in getting approval, especially when it comes to bad credit home loans. A cosigner with a good credit history may mitigate the risk associated with your late payments or lower credit score. This might enable you to qualify for a loan with better mortgage rates and conditions. However, both you and the cosigner should be fully aware of the responsibilities involved, as the cosigner would be equally liable for the debt.
Generally speaking, a bad credit mortgage could lead to higher closing costs. Lenders often perceive home loans with bad credit as higher risk, and they may charge additional fees to offset that risk. It’s essential to carefully review the terms and ask your lender about any extra costs so you can understand the full financial picture. Remember, different lenders may have different policies, so shopping around might lead to more favorable terms.
Your credit score does indeed have an impact on mortgage insurance premiums. If you have bad credit, you might find that the cost of mortgage insurance is higher. This is because insurance providers view individuals with lower credit scores as more likely to default on the loan. This can also affect the minimum down payment required for the insurance. It’s wise to explore various options and speak with a financial expert or lender who can provide personalized information based on your unique situation.
Unlike personal loans and student loans, mortgages are secured loans. The security comes from the value of your home, which your lender could repossess if you default. FHA, VA, and USDA loans have an additional level of protection: backing from the federal government. That’s why you could still get an FHA loan, for example, even with a credit score below 580, which most lenders consider subprime lending.
This is a personal choice. Improving your credit before buying could save you a lot of money in the long run. But, since real estate tends to appreciate in value, buying into the housing market now means you could capitalize on rising real estate prices, which could offset some of the higher costs of borrowing with poor credit. Of course, if your credit score is too low to get a mortgage approval of any kind, you’ll definitely need to work on your credit report before borrowing.
Yes, bankruptcy or foreclosure can affect your ability to qualify for a mortgage loan. Even when you meet a loan’s minimum requirements, lenders may consider your application higher-risk. When this happens, you might have to increase your credit score, lower your DTI, or increase your down payment to qualify.
Check your eligibility for a bad credit home loan
It’s possible to buy a house with bad credit.
You’ll likely pay a higher mortgage rate, but you could get on the homeownership ladder now and start building equity. And you can always refinance to a lower rate later once your credit improves.
Want to find out whether you qualify for one of the many home loans for bad credit? Consulting with a mortgage loan officer about your options is free and will help you determine which bad credit mortgage program is best for you.Time to make a move? Let us find the right mortgage for you