How To Get A Home Loan With Bad Credit: Your Mortgage Options
It’s not hard to get a couple of blemishes on your credit report. If you’ve made past credit mistakes or dealt with unexpected expenses like medical bills, you might be concerned about qualifying for a mortgage.
Don’t worry: If you have a low credit score, there are still mortgage options available to borrowers looking for their dream home. Learn all about getting a home loan with bad credit, the credit score you’ll need to buy a house, and the types of home loans to consider for bad credit.
Key Takeaways:
- Your credit score influences how easy it is to get approved for a mortgage, as well as the interest rate you’ll pay.
- Having bad credit will make qualifying harder and your loan more expensive.
- Look for programs, like FHA loans, that accept borrowers with lower credit scores.
What Is Considered A ‘Bad’ Credit Score When Looking To Buy A Home?
To determine your creditworthiness, loan qualification and even an interest rate, a mortgage lender will look at your qualifying FICO score, among other factors.
The minimum credit score to buy a house with a conventional mortgage is typically 620, depending on the loan program. If your credit is lower than that, it may be difficult for you to get a mortgage. While it is possible, you should expect higher interest rates and less favorable loan terms.
Conventional loans aren’t the only types of loans available for homeowners, though. There are several programs that make it possible to buy a home with a score as low as 500.
How Is Your Credit Score Determined?
Using information from the three major credit bureaus (Equifax, Experian and TransUnion), FICO compiles findings to assign individuals a credit score ranging from 300 to 850. These credit scores are calculated based on factors such as:
- Payment history
- Amount owed
- Length of credit history
- Types of credit accounts
- New credit applications
In general, the fewer late or missed payments you have, the less you owe, the longer you’ve had access to credit, the more types of credit you have, and the fewer new credit accounts you have, the better your score will be.
How Mortgage Lenders Evaluate Your Credit Score
The way your qualifying credit score is calculated will depend on the investor in your loan. Most of the time, your qualifying score is based on your median or middle score between the three credit bureaus. If you have two or more borrowers on the loan, the lowest middle score between all clients is used for qualification.
The exception is a conventional loan that will be purchased by government-sponsored enterprise Fannie Mae. With these loans, when there are two or more borrowers, Fannie Mae uses the average of the borrowers’ median credit scores to determine whether you qualify.
If a client has a median score of 580 and the other has a score of 680, their qualifying score would be 630. Taking the average of these two scores means a borrower might qualify with two incomes where they otherwise wouldn’t.
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Credit Scores Needed To Buy A House
Before delving into how to get a home loan with a bad credit score, it’s a good idea to get an idea of how your score stacks up and what it means for your chances of mortgage approval, as well as the types of terms you would get on a loan.
Let’s take a look at the credit score ranges and what they might mean for your mortgage.
Impact Of Credit Score On Mortgage
| Credit Score Range | Credit Level | Mortgage Implications |
|---|---|---|
| 800 – 850 | Excellent | You’re at the very top end of the credit score range. You’re likely to get approved for the best possible terms on a loan, as you represent the lowest risk for lenders. |
| 740 – 799 | Very good | While not at the very top of the mountain, your score is above average. You’re likely to be approved, along with getting really good interest rates and other loan terms. |
| 670 – 739 | Good | You’ve got a good score, though it can still be improved. You’ll likely pay slightly higher mortgage rates based on risk factors, although your chances of approval are still good. |
| 580 – 669 | Fair | You can be approved for an FHA or VA loan by many lenders at this level, but you may be required to carry less debt and pay slightly higher rates. |
| < 580 | Poor | Loans to consumers with credit scores of less than 580 are considered “deep subprime.” That means it can be challenging to find a lender who will approve you. Those that do may require high down payments, as well as a higher interest rate. |
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Can You Get A Mortgage With Bad Credit?
“If you have bad credit, your mortgage options will be limited, and you are likely to pay a higher interest rate,” says Jay Zigmont, Certified Financial Planner and Founder of financial planning firm Childfree Wealth in Mount Juliet, Tennessee. However, that doesn’t mean it’s impossible.
If you have a credit score of 580 or above, you’ll have an easier time finding a lender, however, there are some home loans, such as FHA loans, available if your credit score is between 500 and 579.
If you’re considering a home loan with bad credit, it’s important to closely examine the terms, interest rate and potential risks before moving forward.
Challenges Of Buying A House With Bad Credit
Buying a home with a low credit score is difficult for a few reasons.
The obvious one is that poor credit makes it harder to qualify for a loan in the first place. If you don’t have a score of at least 620, you’ll have trouble getting a conventional loan, cutting off some of the most popular mortgage types. And if your score is below 500, you won’t be able to qualify for a typical FHA loan.
Even if you do find a willing lender, the cost will also pose a major challenge. You may need to provide a larger down payment to compensate for poor credit. The interest rate of the loan, and therefore the monthly payment, will also be noticeably higher.
This table outlines the cost of a $400,000, 30-year fixed-rate mortgage based on credit score as of Sept. 20, 2024.
How Your Credit Score Impacts Your Mortgage
| FICO Score Range | APR | Monthly Mortgage Payment | Total Interest Paid Over Loan Term |
|---|---|---|---|
| 760 – 850 | 6.58% | $2,549 | $517,767 |
| 700 – 759 | 6.587% | $2,551 | $518,433 |
| 680 – 699 | 6.592% | $2,553 | $518,908 |
| 660 – 679 | 6.594% | $2,553 | $519,098 |
| 640 – 659 | 6.596% | $2,554 | $519,288 |
| 620 – 639 | 6.605% | $2,556 | $520,144 |
Even someone with a good score will find themselves paying thousands more over the life of a loan compared with someone who has excellent credit. If your score is below 620, your mortgage cost will be significantly higher.
Home Loan Options For Buyers With Bad Credit
The FHA loan program is a popular option that you’ll want to look into if you’re applying for a mortgage with a low credit score.
You might also consider VA loans or USDA loans if you’re eligible. Other programs, like the Fannie Mae HomeReady loan program, might also be a good fit for some borrowers.
Let’s take a look at these loan options, their features and what you can expect.
FHA Loans
The Federal Housing Administration offers a government-insured loan with flexible credit score requirements. This type of loan also offers lower down payments, low-equity refinances and often lower interest rates.
If you have a median credit score of at least 580, your down payment can be as low as 3.5%. You can even qualify for an FHA loan with a score as low as 500, but you’ll need to make a down payment of at least 10%.
An FHA loan also allows you to have a higher DTI ratio than conventional mortgages – while you should aim for 43%, there is some flexibility the higher your credit score is. The maximum DTI ratio for an FHA loan is 57%. This is beneficial for first-time home buyers with low income who have debt.
Keep in mind that with an FHA loan, you’ll typically have to pay both an upfront and annual mortgage insurance premium for the entire life of the loan. If you make a down payment of 10% or more, you’ll be able to get rid of mortgage insurance after 11 years. (Another option is to refinance to a conventional mortgage once you’ve built sufficient equity in your home.)
VA Loans
If you’re a veteran or currently serving in the military, you could qualify for a VA loan. Because the Department of Veterans Affairs backs these loans, they have less stringent credit guidelines.
Although some lenders may have a number in mind, the VA itself has no standard required credit score for a VA loan. Like an FHA loan, a VA loan is more forgiving of past financial difficulties, like bankruptcy, and typically has lower interest rates compared with other programs.
There is usually no down payment required for a VA loan. Additionally, mortgage insurance isn’t necessary. Instead, you typically pay a one-time funding fee at closing or build it into the loan.
Keep in mind that to qualify for a VA loan, you have to fall under one of the following categories:
- A current United States military servicemember
- An honorably discharged veteran
- A qualifying surviving spouse of a veteran or service member who died in service or from a service-connected disability
You also must be able to obtain a VA Certificate of Eligibility, and either you or your spouse (if you’re actively deployed) must live in the home.
Finally, you need to meet minimum service time requirements, which can vary based on how you serve. There are a few exceptions to this, such as if you’re discharged due to a service-connected disability.
USDA Loans
USDA loans are specialized loans insured by the U.S. Department of Agriculture. You can only use a USDA loan to purchase land in qualifying areas, which are typically in rural locations.
To qualify, you cannot make more than 115% of the area’s median household income. If you can get one of these loans, you’ll benefit from easier qualifying and no down payment requirement.
Nonqualified Mortgages
Nonqualified mortgages are mortgages that do not meet the requirements of a qualified mortgage, so it’s a very large category of loans.
These loans can have highly unusual, and risky, features, such as having an interest-only payment period, negative amortization where the loan’s principal grows rather than shrinks over time, balloon payments or terms longer than 30 years.
Nonqualified mortgages can have very different – and sometimes more flexible – requirements than qualified loans, but they can be difficult to find. You might be able to qualify for one if you have poor credit and find a willing lender, but be careful and make sure you understand the loan details fully before signing.
Conventional Loans
A conventional loan is any mortgage that isn’t insured or guaranteed by a government program. These loans can be conforming or nonconforming.
Conforming loans have loan limits, credit score requirements and other requirements that may be hard to meet if you have poor credit, so you’ll likely need to apply for a nonconforming loan if your credit score is low. Nonconforming loans tend to be more expensive due to higher interest rates and can be harder to find.
Fannie Mae HomeReady
Fannie Mae HomeReady mortgages are designed to make it easier for people to buy homes. They feature a low down payment requirement of just 3% and cancelable mortgage insurance.
However, you’ll need a credit score of 620 to qualify, though borrowers with nontraditional credit are also eligible.
Freddie Mac Home Possible
Freddie Mac Home Possible loans, like Fannie Mae HomeReady loans, aim to make homeownership easier for people to achieve by offering a 3% down payment requirement and more flexible credit requirements.
To qualify, you must make no more than 80% of the area median income.
First-Time Home Buyer Programs
First-time home buyer programs are available in many states and regions. They’re typically operated by local governments, and they offer assistance such as easier qualifying, down payment assistance and reduced mortgage rates.
Every program is different, so it’s important to check with lenders and government agencies in your area to see what programs are available and what their requirements are.
Types Of Home Loans For Buyers With Bad Credit
| Mortgage Type | Qualifying Credit Score | Judgments and Tax Liens | Most Recent Foreclosure | Types of Bankruptcy | Waiting Period |
|---|---|---|---|---|---|
| USDA loans | None, but many lenders require 620 or higher | Paid in full or repayment plan in progress | Exception required if in the past 36 months | Chapter 7 or Chapters 11, 12, 13 | Exception required if less than 3 years 1 year |
| Nonqualified mortgages | Varies based on lender. Many lenders require 620, some require 500. | Varies based on lender | Varies based on lender | Varies based on lender | Varies based on lender |
| Fannie Mae HomeReady | 620 | Paid in full for most liens and judgments. Payment plan OK for unpaid federal income taxes if no tax lien has been filed. | 7 years from the date on your credit report; or 3 years for documented extenuating circumstances, with stricter loan requirements for applications during the period between 3 and 7 years | Chapter 7 or Chapter 11 | 4 years; or 2 years with documented extenuating circumstances |
| Chapter 13 | 2 years from discharge date; or 4 years from dismissal date; or 2 years from dismissal date with documented extenuating circumstances | ||||
| Freddie Mac Home Possible | 660 | Paid in full | 3 years, with additional requirements for loans before 7 years | All types | 2 years from the discharge or dismissal date, with additional requirements for loans before 7 years |
| First-time home buyer programs | Varies by program | Varies by program | Varies by program | Varies by program | Varies by program |
Recent negative marks on your credit report are a major red flag for lenders. For example, a recent bankruptcy or foreclosure will cause the vast majority of lenders to simply deny your application by default. Most loan programs have set waiting periods of a few years if you’ve had a bankruptcy or foreclosure too recently, during which you won’t be able to qualify for a loan.
Judgments and tax liens, which you can encounter if you lose a legal case and must pay money or if you fail to pay your taxes, generally must be paid in full before you can qualify for these loans.
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How To Get Approved For A Mortgage With Bad Credit
“Boosting your credit fast is possible, but managing expectations is important,” says R.J. Weiss, a Certified Financial Planner and Founder of personal finance website The Ways to Wealth, based in Geneva, Illinois. “One of the best things you can do is pay down as much of your credit card debt as possible; this will decrease your credit utilization to less than 10%. But, more importantly, when it comes to buying a house, this lowers your debt-to-income ratio, a key factor lenders consider when determining your mortgage eligibility.”
Here are some additional steps you can take to increase your chances of success when shopping for a mortgage:
- Check your credit score. Before you start applying for a loan, check your credit score to get an idea of what you’re working with. This will also give you a chance to see if there are quick ways to boost your score.
- Lower your debt-to-income ratio. If you have any smaller debts you can pay off, try to do so. This will reduce your debt-to-income ratio and make you more appealing to lenders.
- Shop around for rates. Always take the time to get quotes from multiple lenders. Each lender will make their own lending decision and may give you a different rate. Checking with more than one lender can help you find a willing lender and the best deal.
- Speak with your lender. If you’ve sent multiple applications to different lenders and are having trouble getting approved, try reaching out to ask them to reconsider. This can be effective if you can show extenuating circumstances that are the cause of your current poor credit.
- Apply individually. If you’re applying with a partner or spouse and one of you has good credit while the other’s credit is poor, consider having the person with good credit apply alone. If you only consider that person’s income and assets, the higher credit score may help you qualify.
- Liquidate assets. If you have assets like stocks or bonds, consider selling them off so you can show a larger bank account balance to your lender.
- Increase your down payment. The larger your down payment, the smaller the loan you have to apply for, the more skin you have in the game, and the less the lender risks by offering a loan. All of these things can be appealing to lenders, making it easier for you to qualify.
- Ask family for help. Your family may be willing to help you with buying a home, either by co-signing on the mortgage or offering to help with the down payment.
- Add a co-signer. If you can get a friend or family member with good credit to co-sign, that can make it easier to get approved. Check with your lender to see what is required of co-signers, and remember that co-signers are accepting full responsibility for the loan. That means they’re placing a lot of trust in you, so make sure you handle the mortgage responsibly.
- Pay down or pay off debt. The less debt you have, the better your credit score tends to be and the lower your DTI ratio will be. Paying off loans will make you more appealing to lenders.
- Dispute inaccurate information on credit reports. Errors on your credit report, such as payments falsely marked as late or debts that aren’t yours, can drag down your score. Disputing and removing inaccuracies can boost your score and help you qualify.
- Avoid mortgage offers that seem too good to be true. As with everything in life, if something sounds too good to be true, it probably is. Avoid lenders making grand offers to solve all your problems and get you a cheap loan despite your bad credit, and read everything carefully before signing.
How To Improve Your Credit Before Buying A Home
While there are mortgage options for people with poor credit, it’s likely a better idea to try to boost your credit score before you start shopping for a home. It can make getting a loan easier and save you a lot of money in the long run.
To boost your credit, try these tips:
- Increase your available credit. Your credit utilization rate (your total credit balance divided by your total available credit limit) impacts your credit score, with utilizations of 30% and below considered preferable. If you can increase your credit limits, you can lower your utilization and improve your credit score.
- Add new accounts (in bulk). While new accounts will lower your score somewhat by adding inquiries to your report and reducing the average age of your credit, they can also lower your credit utilization rate by increasing your credit limit.
- Pay for deletions. If you have accounts in collections, you can work with the collection agency by sending a pay-for-delete letter. If the agency agrees, you settle or pay all of the owed amount in exchange for the agency deleting the collection item from your credit report, which can help your score. Otherwise, even paid in full, most collections accounts remain on your credit report for seven years.
- Avoid unnecessary hard credit inquiries. Each time you apply for a loan or credit card, the lender checks your credit, and the credit bureau makes a note of that inquiry on your credit report. Each hard inquiry drops your score by a few points, so avoid unnecessarily applying for loans shortly before applying for a mortgage. But it’s worth noting that if you’re applying for some types of loans, like auto loans or a mortgage, applying en masse (within 45 days) will combine all of the hard pulls into one inquiry on your report, limiting the impact on your score.
- Consider a rapid rescore. A rapid rescore involves your lender asking credit agencies for an updated version of your credit report, in which recent payment information and account changes are added in more quickly than usual. If you’ve just paid off a debt or removed a collection, this can get lenders an updated version of your report quickly, helping you qualify.
Can You Buy A Home After Bankruptcy Or Foreclosure?
Yes, it is possible to buy a home after going through bankruptcy or a foreclosure, but it isn’t necessarily easy, and you may have to wait some time.
Most types of mortgages have a waiting period, during which you cannot qualify for a loan. For example, conventional loans have a four-year waiting period, so you won’t be able to get a conventional mortgage until four years after you go through bankruptcy.
You may be able to get an FHA or VA loan soon after bankruptcy, however. For Chapter 13 bankruptcies, there is no waiting period once the court has dismissed or discharged your loan. Check with lenders in your area to see what programs are available and what their waiting periods are.
Foreclosures lead to similar waiting periods. If you have a home foreclosed on, you’ll need to wait for some time before you can apply and qualify for another loan.
FAQ
Now that you have a bit more information about what it takes to get a home loan with bad credit, you might still have questions. Let’s take a look at some commonly asked questions about the mortgage process.
– Down payment amount
– Debt-to-income ratio
– Income and assets
– Employment history
– Co-signers
However, make sure your co-signer has good credit. If your co-signer has a lower credit score than you, including them on the application could harm, rather than help, your chances of being approved.
The Bottom Line
Buying a home with poor credit is still possible. While it may take additional time and research to find an option that works for you, it can be well worth the effort. Whether you decide to spend some time repairing your credit before applying or you’re ready to take the next step toward homeownership now, don’t let a low credit score stand in the way of your future plans.
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