Home loan options with bad credit

The definition of a bad credit score varies between mortgage lenders. But, as a rule of thumb, the FICO scoring model considers scores beneath 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.”

Home loan options with bad credit

What is a bad credit mortgage?

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.Verify your home loan eligibility. Start here (Feb 12th, 2023)

Home loans for bad credit

Some mortgage programs are specifically designed to help low-credit applicants buy homes.

The FHA loan program is commonly known as a bad credit home loan because it allows FICO scores starting as low as 500-580. But it’s not the only mortgage program for borrowers with lower FICO scores.

Here are seven low-credit-score home loans that may work for you:

  1. FHA loan: Min. score 580 (3.5% down) or 500 (10% down)
  2. VA loan: Min. score 580-620 (0% down)
  3. USDA loan: Min. score 640 (0% down)
  4. Conforming loan: Min. score 620 (3% down)
  5. HomeReady loan: Min. score 620 (3% down)
  6. Home Possible loan: Min. score 660 (3% down)
  7. Non-QM loan: Min. score 500-580 (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.

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What’s the lowest credit score to buy a house?

Across the industry, the lowest possible credit score to buy a house is 500. But there’s a limited number of mortgage lenders that allow such low scores and their interest rates are typically higher.

The most common loan type for bad credit borrowers is an FHA loan. The Federal Housing Administration technically allows FICO scores between 500 and 579 with a 10% down payment. But most FHA lenders stick to the agency’s higher threshold of a 580 score with 3.5% down since it’s less risky for the lender.

Private lenders might also offer “non-qualified mortgage” (non-QM) programs that are not backed by any government agency and have more lenient rules. These programs might allow credit scores as low as 500, though interest rates on non-QM loans tend to be substantially higher than those on conforming and government-backed loans. So it’s typically better to go with an FHA loan or another standard home loan program if you qualify.Check your home loan options. Start here (Feb 12th, 2023)

7 Bad credit home loan options

These seven mortgage loan programs can help borrowers with lower credit achieve their homeownership goals. Requirements and credit score minimums vary by program.

The best mortgage for you will be one that provides flexible qualification guidelines and allows 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 an FHA loan 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 to 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, this means 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.Verify your FHA loan eligibility. Start here (Feb 12th, 2023)

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 loans do not require a down payment or any ongoing mortgage insurance payments. (Although there is a one-time funding fee which most borrowers roll into the loan amount.)

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.Verify your VA loan eligibility. Start here (Feb 12th, 2023)

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.

These mortgages are backed by the U.S. Department of Agriculture with the goal of increasing 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.Verify your USDA loan eligibility. Start here (Feb 12th, 2023)

4. Conventional loan: 620 credit score

Non-government conventional mortgage loans charge higher interest rates and fees for borrowers with low credit scores.

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 the loan amount and home value. It’s determined by your down payment; for example, 3% down leads to a 97% LTV

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.Verify your conventional loan eligibility. Start here (Feb 12th, 2023)

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. 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 (Feb 12th, 2023)

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 allows a variety of down payment assistance programs.

To qualify for the Home Possible loan with reduced PMI rates, most lenders will require a 660 or better credit score.Verify your Home Possible eligibility. Start here (Feb 12th, 2023)

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 the reason most loans require a minimum credit score in the 600s as well as 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 found 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. So if your credit score is a little 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.Check your home loan options. Start here (Feb 12th, 2023)

Tips to get a mortgage loan with 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:

  • Reduce your DTI: Lenders will check your debt-to-income ratio, or DTI, to see whether you could 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 may be able to 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 are looking better.

Tips to improve your credit score before buying

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.

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 payments and missed payments will pull down your FICO score. Be sure to make on-time payments on all your loans and credit cards
  • 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 own credit history so you’ll notice errors before they pull down 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 have the ability to run scenarios through their credit agency providers and see the most efficient and/or cost-effective ways to get your scores increased. And this can be a much more effective route than going it alone.Check your home loan options. Start here (Feb 12th, 2023)

Bad credit mortgage loans FAQ

What mortgage company works with bad credit?

Different mortgage lenders will see 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. Be sure to work with one that is licensed by the Nationwide Mortgage Licensing System (NMLS).

Can I get a home loan with a 500 credit score?

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 you’ll need to be prepared to make a larger down payment. It will also help if you have few other debts compared to your monthly income.

Can I get a home equity loan with a 500 credit score?

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 that’s secured by the value of your home.

What credit score is considered bad credit?

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.

Can a cosigner help me get approved?

A co-signer or co-borrower might help you get mortgage-approved with bad credit if the lender is willing to average both scores. However, some lenders only consider the lower of the two credit scores on an application. So make sure you shop around and ask about different lenders’ policies.

Will a bad credit mortgage require higher closing costs?

There’s no direct correlation between lower credit scores and higher closing costs. But borrowing with bad credit does limit your loan options, which can increase borrowing costs. For example, let’s say you have a FICO score of 510 and can find only one lender willing to approve your FHA loan. If that lender charges a higher-than-average loan origination fee, you won’t have the option of shopping around for lower fees from other lenders.

Does mortgage insurance cost more when you have bad credit?

Yes, bad credit will affect how much you pay in private mortgage insurance on a conventional loan. For FHA loans, your credit score will not affect mortgage insurance premium rates. However, your credit score will affect your down payment requirement. You’d need a 10 percent down payment on an FHA loan with a credit score below 580.

How do mortgage lenders afford bad credit loans?

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 defaulted. 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.

Should I improve my credit score before buying real estate?

This is a personal choice. Improving your credit before buying could save 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.

Does bankruptcy affect your ability to qualify for a home loan?

Yes, a 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 home buying eligibility

It’s possible to buy a house with bad credit. You’ll likely pay a higher interest rate, but you could get onto 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 a home loan? Talk to a lender about your options. Consulting with a mortgage loan officer is free and will help you determine which bad credit mortgage program is best for you.

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