How to Get a Home Loan with Bad Credit
Homebuyers in search of bad credit home loans have several options to consider. A range of mortgage programs offer home loans for bad credit, and there are many lenders willing to take a chance on prospective homeowners with credit blemishes.
Do home loans for bad credit exist?
Yes, it’s possible to get a mortgage even if you have bad credit. We’ll cover how to do it but, first, let’s go over what’s considered “bad” credit and how mortgage lenders evaluate credit scores and other financial information.
How lenders evaluate your credit
When you apply for a home loan, lenders will look at your credit scores and overall financial picture. The term “bad credit” doesn’t appear in official classifications of credit scores, but “bad credit” is often used to describe a score near the minimum allowed for a particular loan program (specific mortgage requirements vary by lender and loan program).
“Bad credit” can also mean your credit history shows one or more of the following:
- Multiple late payments
- High balances on credit cards and loans
- Multiple new accounts
- Debts sent to collections
- Loan default
- Bankruptcy
- Foreclosure
- Short sale
Your credit score is important to lenders because it represents how risky it is to lend you money. That said, even two borrowers with the exact same credit score will have gotten there via different paths, and lenders might view their circumstances somewhat differently because of that.
Learn more about getting a mortgage prequalification vs. preapproval.What is a bad credit score?
Using the FICO scoring system, a bad credit score is any score in the 300-579 range. There are three major credit bureaus — Equifax, Experian and TransUnion — and multiple types of credit scores. However, most lenders use the FICO Score, created by Fair Isaac Corporation. A FICO Score can fall within the range of 300 to 850, with the average score in the U.S. landing at 715.
Don’t know your credit score? Get your free score on LendingTree Spring today.Here’s a look at the classifications of FICO Scores:
| Credit score range | Rating |
|---|---|
| 800-850 | Exceptional |
| 740-799 | Very good |
| 670-739 | Good |
| 580-669 | Fair |
| 300-579 | Poor |
Since “bad credit” likely won’t outright prevent you from getting a home loan, what really matters is that you understand how your credit score will affect your path to homeownership.
| Credit score range | Borrower classification | Consequences for borrowers |
|---|---|---|
| 780 and above | Optimal | The lowest possible closing costs and interest rates |
| 740 and above | Superprime | The lowest possible interest rates |
| 720 and above | Superprime | Very good odds of being approved for most loans |
| 680 and above | Prime | Good odds of being approved for most loans |
| 620-679 | Nonprime | Less likely to be approved for a loan and may see higher interest rates and lower loan amounts |
| 540-619 | Subprime | May struggle to get approved for a loan |
| 539 and below | Deep subprime | May struggle to get approved for a loan |
Your credit score is just one factor mortgage lenders will consider when you’re buying a home with bad credit, but it’s weighed heavily because it represents your risk to lenders.
Learn more about how to improve your credit score.How to buy a house with bad credit: 5 loan options
At the end of 2023, the median FICO Score for newly originated mortgages was 770, which is much higher than the average credit score. Fortunately, buyers with scores well below that number or adverse events in their credit history can still pursue homeownership through one of the following bad credit home loans.
| Loan program | Minimum credit score | Minimum down payment | DTI ratio* |
|---|---|---|---|
| FHA loans | 500 | → 3.5% with a 580 credit score or higher → 10% with a 500-579 credit score | 43% |
| VA loans | None, but most lenders look for 620 | No down payment required | 41% |
| USDA loans | None, but most lenders look for 640 | No down payment required | 41% |
| Fannie Mae HomeReady® loans | 620; borrowers without credit scores can use alternative data | 3% | 45% |
| Freddie Mac Home Possible® loans | 660; borrowers without credit scores can use alternative data | 3% | 45% |
*Some programs may permit a higher DTI under certain circumstances.
FHA loans
An FHA loan is a mortgage insured by the Federal Housing Administration (FHA) and can be a solid option when buying a house with bad credit, as FHA lenders have some of the most lenient qualifying requirements. The FHA minimum credit score is 500 with a down payment of 10% or more — but if you want to make the minimum 3.5% down payment, you’ll need a 580 credit score.
FHA loans also provide shorter waiting periods after major credit issues — like foreclosures, bankruptcies, judgments or tax liens — than conventional loans. To offset the risk inherent in these more lenient borrower requirements, FHA loans come with two types of FHA mortgage insurance premiums, upfront and annual.
See current FHA loan rates today.VA loans
Available to active-duty service members, veterans and eligible spouses, VA loans, which are backed by the U.S. Department of Veterans Affairs (VA), are available to active-duty service members, veterans and eligible spouses and don’t require a down payment. And while there’s no minimum credit score for VA loans, most lenders will usually look for a 620 score or higher. VA loans come with a funding fee (a percentage of the loan amount) that can be paid upfront at closing or rolled into the loan.
See current VA loan rates today.USDA loans
Rural borrowers may qualify for a mortgage directly with the U.S. Department of Agriculture (USDA) or through a USDA-approved lender. These loans are available to low- and moderate-income borrowers who live in designated rural areas, typically based on population size.
Fannie Mae HomeReady® loans
Borrowers without credit scores can qualify for a conventional HomeReady® loan with alternative credit sources, including bill payment history. The minimum down payment is 3%, but borrowers who put down less than 20% will need to pay for private mortgage insurance (PMI).
Freddie Mac Home Possible® loans
Similar to HomeReady®, Freddie Mac’s Home Possible® program is available to borrowers without credit scores. A minimum 5% down payment is required for those without a score; otherwise, the minimum is 3%. Borrowers with down payments below 20% will need to pay for PMI.
Bad credit mortgage lenders: Lender options for bad credit home loans
Here are some lenders you may want to consider if you’re applying for a home loan with a low credit score:
| Lender | Good for: | Min. credit score | Min. down payment |
|---|---|---|---|
| Carrington Mortgage Services | Low credit FHA loans Low credit VA loans | 500 (FHA and VA loans) | 3.5% (FHA loan) 0% (VA loan) |
| Guild Mortgage | Low credit FHA loans | 540 | 3.5% |
| Sebonic Financial | Low credit FHA loans | 550 | 3.5% |
| Rocket Mortgage | Low credit VA loans | 580 | 0% |
Read our full list of the best mortgage lenders.How to boost your chances of being approved for a bad credit home loan
Fortunately, even if you have a low income, a poor credit score or negative marks in your credit history, you can still bolster your chances of getting a home loan with bad credit. Here are eight ways to increase your odds of landing a mortgage preapproval.
1. Understand what’s on your credit reports
Sometimes inaccurate information can show up on your credit reports. Take the initiative to request a copy of your credit reports from the three main credit bureaus at AnnualCreditReport.com and review them for errors before looking into bad credit home loans.
2. Remove errors and paid-off debts from your credit report
If you spot any incorrect information on your credit report, you can follow these procedures to submit disputes and get the errors removed. If you’ve had payments sent to collections in the past, they may still be on your report as well — even if you’ve paid them off. In some cases, you can request that the lender remove the entry from your credit report, or you can offer to pay a still-outstanding debt in return for having it immediately removed. Your creditor doesn’t have to agree, but sometimes it will.
3. Increase your down payment
Putting more money down can go a long way toward getting you approved for a mortgage, as it helps demonstrate to lenders that you’re a less risky borrower. In the case of FHA loans, a higher down payment means you can qualify with a 500 credit score. In addition, increasing your down payment can improve your mortgage rate and lower your closing costs.
Crafting a budget to find ways to cut expenses or picking up a side hustle to generate more income can help you save for a larger down payment. You should also consider committing any lump sums you receive, like tax refunds or bonuses, toward your down payment. Finally, if you have loved ones who may be willing and able to help, you can always ask them to gift money toward your home purchase.
4. Pay down debt and lower your DTI
One factor lenders consider when deciding whether to approve you for a loan is your debt-to-income (DTI) ratio. Your DTI ratio is calculated by dividing your total debt, including your mortgage payment, by your gross monthly income. Ideally, when you’re buying a house with bad credit, you’ll want to shoot for a ratio that’s no greater than 43%. DTI requirements do vary by loan and lender, however, and often sit in the 41% to 50% range.
→ Strategies to lower your DTI include paying down some of your debts, increasing your income or getting a cosigner.
Read more about how to lower your mortgage payment.
5. Focus on a track record of on-time payments
Your payment history accounts for 35% of your FICO Score. As such, maintaining a flawless payment history is one of the best ways to improve your credit score and increase your chances of getting a home loan with bad credit. If you have a pattern of making late payments, you may want to wait before applying for a mortgage to minimize the impact on your loan terms.
6. Shop around for lenders
When searching for bad credit mortgage lenders, keep in mind that borrower requirements and rates will vary between types of lenders. For example, a local credit union may have more forgiving terms than a national bank, while an online lender may have a proprietary loan program you could qualify for. Be sure to consider options from multiple lenders and compare rates and terms when shopping for a mortgage.
7. Find a cosigner or co-borrower
Not all loan programs allow it, but in some cases you can use a cosigner or co-borrower to boost your income — this can have a major effect on your DTI ratio and the loan amount you qualify to borrow. FHA loans, for example, usually require that borrowers live in the home they purchase but will allow you to use the income of an out-of-state co-borrower or cosigner to qualify for a mortgage — even though they won’t be living in the home with you.
8. Seek a lower loan amount
One way to make qualification easier is simply to aim a little lower on your preferred loan amount. One popular option, especially in nonurban areas, is a manufactured home. Modern manufactured homes can look surprisingly similar to site-built homes and cost around $71 less per square foot, compared to a typical site-built home.
Learn more about how to buy a mobile home.Should you get a bad credit home loan or wait?
When you’re buying a home with bad credit, you’re seen as a bigger risk in the eyes of lenders. To offset that risk, lenders typically charge a higher interest rate than they would charge someone with excellent credit. A higher interest rate means a more expensive loan in the long run.
Example scenario
Here’s an example of how a low credit score can impact the interest rate and total interest paid on a $350,000, 30-year fixed-rate mortgage. (Our example doesn’t factor in property taxes, homeowners insurance, mortgage insurance or other fees.)
| Credit score | APR | Monthly payment (principal and interest only) | Total interest paid |
|---|---|---|---|
| 760-850 | 6.538% | $2,221 | $449,557 |
| 700-759 | 6.760% | $2,272 | $468,071 |
| 680-699 | 6.937% | $2,314 | $482,957 |
| 660-679 | 7.151% | $2,364 | $501,098 |
| 640-659 | 7.581% | $2,467 | $538,009 |
| 620-639 | 8.127% | $2,599 | $585,723 |
Source: MyFICO.com
As you can see, the differences between credit score ranges can translate to tens of thousands in extra interest charges over the life of the loan. In our example, a borrower with a 639 credit score could save $84,625 by getting their credit score up to 660. Depending on your circumstances, waiting and improving your credit score instead of buying a house with bad credit could result in significant savings.
Try using our mortgage calculator to estimate your monthly payment:
Frequently asked questions
There are multiple credit scoring models, so classifications of scores vary. However, the most widely used credit scores are FICO Scores, which range between 300 and 850. On the FICO scale, a credit score below 580 is rated as “poor.”
Yes, it’s possible with an FHA loan or nonconforming loan. These loans have more flexible credit requirements than conventional loans. However, they can come with drawbacks — typically higher interest rates or higher APRs (or both). Plus, in the case of an FHA loan, you’ll have to make at least a 10% down payment if you have a credit score between 500 and 580.
You might pay more, but only indirectly. There won’t be an extra line item added to penalize borrowers with bad credit, but in some cases, your costs may be higher if you have bad credit. For example, if you’re paying a steeper interest rate because your credit score is low, your prepaid interest charge may come out to more than it would have for someone paying a lower interest rate.
You should also keep in mind that your closing costs will depend on the type of loan you get, the home’s purchase price and other factors. For example, VA loan borrowers pay a funding fee, while FHA loan borrowers pay an upfront mortgage insurance premium.
Buying a house with bad credit doesn’t automatically mean you’ll pay higher mortgage insurance premiums. Your loan type and down payment will largely determine how expensive your mortgage insurance will be. For example, all FHA loans come with two types of mortgage insurance premiums, which are based on your loan amount, LTV ratio and location — your credit score doesn’t play into that calculation.
Conventional loan borrowers who put down less than 20% will pay a similar fee, called private mortgage insurance (PMI) — however, in this case your credit score is a factor in determining how expensive it will be.
Having a cosigner on a home loan is possible, but asking someone to be a cosigner is a decision that shouldn’t be taken lightly. This person will be on the hook for your loan if you miss payments, which puts their creditworthiness at risk.
Yes, you can refinance a bad credit mortgage, but whether it’s worth it depends on your specific loan terms. If your credit has improved since buying a home with bad credit, and interest rates haven’t gone up significantly in that time, you may qualify for a lower rate or a mortgage with better loan terms. Keep in mind that you’ll have refinance closing costs, too, which will add to the cost of getting into that new mortgage.
Yes, you can get a mortgage after filing for bankruptcy. However, you’ll first need to go through a waiting period — this can range from one to four years, depending on the loan program and type of bankruptcy you filed.
If you’ve had a mortgage foreclosure, you’ll have to wait longer than you would after any other credit issue. Foreclosure waiting periods range from two to seven years. If, however, extenuating circumstances led to the foreclosure, such as an illness or job loss affecting the household’s breadwinner, there might be exceptions allowing you to get a loan sooner.