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Can You Get A Home Loan With Bad Credit?

11-Minute Read
Published on October 7, 2021
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*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

It’s not hard to get a couple of blemishes on your credit report. Whether it’s the mistakes of youth or an unexpected medical procedure that puts you behind on bills, it’s easy to see your credit score dip if you’re not careful.

If you have less-than-optimal credit, it’s more difficult to get a mortgage loan, but just because your credit score is bad doesn’t mean you have to give up on your dream of homeownership.

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 median FICO® Score, among other factors.

Using information from the three major credit bureaus (Equifax®, Experian™ and TransUnion®), FICO® compiles findings to assign individuals a credit score ranging from 300 – 850. These credit scores are calculated based on factors such as:

  • Payment history
  • Amount owed
  • Length of credit history
  • Types of credit
  • New credit

To get a conventional mortgage, the minimum credit score is typically 620. 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 rates and less favorable loan terms.

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Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

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Credit Scores Needed To Buy A House

Before going into how to get a home loan with less-than-perfect credit, it’s a good idea to get an idea of where 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.

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.

 

 

720 – 799

 

 

Very Good

 

While not at the very top of the mountain, you’re likely to be approved and get really good interest rates and other loan terms.

 

 

 

620 – 719

 

 

 

Good

 

You’ve got a good score, though it can still be improved. You’ll likely pay slightly higher rates based on risk factors, although your chances of approval are still good.

 

 

580 – 619

 

 

Fair

 

You can be approved for an FHA 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 subprime. That means many lenders won’t approve you. Those that do may require high down payments as well as a higher interest rate.

What Other Factors Do Mortgage Lenders Consider?

Besides your credit score, lenders consider other qualification factors when you apply for a mortgage. These could affect the number of options available to you or the interest rate you receive on the loan.

Before filling out a mortgage application, it’s helpful for home buyers to understand what lenders look for. Although these guidelines apply for Rocket Mortgage, it’s important to note that each lender might have different standards for qualification.

Down Payment Amount

Making a larger down payment will signal to your lender that you’re more creditworthy, giving you a better chance of getting approved for your mortgage and possibly lowering your interest rate.

Debt-To-Income Ratio

Your debt-to-income ratio (DTI) measures your ability to make payments toward money you’ve borrowed based on your total minimum monthly debt divided by your gross monthly income.

Your lender will consider car loans, student loans, credit card debt, home equity loans, mortgages and any other recurring debt to calculate this percentage.

Most lenders will consider a DTI of less than 50% acceptable when qualifying you for a mortgage, but the lower your DTI, the more loan options will be available to you.

There are some options that can help you work around your DTI ratio, like FHA or VA loans. Other than that, paying off your debts is a good way to lower your DTI and get approved for a mortgage program.

Income And Assets

Income and assets are crucial to determining your mortgage eligibility. Simply put, the more income you have, the more likely you are to have a lower DTI and a better chance of making your mortgage payment every month.

This requirement makes the loan less risky for the lender. To document income, your lender will use things like pay stubs, W-2s and tax returns.

Assets are important for two reasons. The first is that you need savings or other resources to come up with a down payment for your home in most situations. Second, depending on the type of loan you’re getting, the lender may require you to have reserves.

You can think of reserves as the number of months of mortgage payments you could afford if you were to suffer a loss of income for any reason. Every situation is different, but 2 months’ worth of reserves is a good guideline for qualification.

Length Of Work History

As important as having an income is, having a history of receiving that income is just as crucial.

Your mortgage lender is going to want to see that you’ll continue to get paid. This is one of the risk factors they’ll examine closely when you apply for a mortgage.

Mortgage lenders will sometimes approve you with as little as a year of work history, but ideally, they like to see 2 years.

You’ll also want to try to avoid changing jobs in the middle of the mortgage process. If your income structure totally changes or you’re moving into a different field, a lender won’t necessarily be able to count on that income continuing in the future.

Co-Signers

Having a co-signer is another thing that can help if you’re in the mortgage qualification bubble. When someone co-signs a loan with you, their income and assets can be used to help you qualify.

The extra income is important because it can lower your DTI ratio. In certain limited situations, your DTI impacts the actual interest rate you get due to pricing adjustments on certain financing types.

Additionally, the assets of the co-signer could be used to show funds for a down payment or reserves. This process could help you get a lower rate if the down payment is big enough.

Can You Buy A House With Bad Credit?

While it may not be easy to get a home loan with bad credit (FICO® Score under 620), it’s possible. However, it’s important to closely examine the terms, interest rate and potential risks before moving forward.

FHA and VA loans are two mortgage programs that may be worth looking into. Additionally, there are several local and national assistance options that may be available to you.

FHA Loans

If you have a lower credit score, an FHA loan may be right for you. The Federal Housing Administration offers a government-insured loan with easier credit score requirements.

This type of loan 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%.

FHA loans do have certain requirements for those who have filed for bankruptcy. There’s typically a waiting period to apply for a loan after a discharge or dismissal. However, the length of time depends on the type of bankruptcy. Ask your lender for more details.

An FHA loan also allows you to have a higher DTI ratio than conventional mortgages, as long as you have a median credit score of 620 or better. This is beneficial for first-time home buyers with low income who have debt.

One thing to keep in mind with an FHA loan is that if you put less than 10% down, you’ll have to pay a mortgage insurance premium for the life of the loan. You could make a down payment of 10% to avoid it, but you’ll still pay it for at least 11 years (unless you refinance once you’ve reached 20% equity in your home).

VA Loans

If you’re a veteran or currently serving in the military, you could also 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, there is 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 to other programs.

There is no down payment required for a VA loan. Additionally, mortgage insurance isn’t necessary. Instead, you 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 be:

  • Currently serving in the United States military.
  • An honorably discharged veteran.
  • A not-remarried (except in limited circumstances) surviving spouse of a veteran or service member who died in service or from a service-connected disability.
  • Able to obtain a VA Certificate of Eligibility, and either you or your spouse (if you’re actively deployed) must live in the home.

If you’re interested in a VA loan, check out this complete guide.

Understanding Loan Options For Less-Than-Perfect Credit

We’ve put together this handy chart to help you understand the options available if your credit is a little messy.

Loan Type

Median Credit Score

Bankruptcy

Foreclosure

Judgments And Tax Liens

 

 

 

 

 

 

 

 

 

Conventional

 

 

 

 

 

 

 

 

 

620

Chapter 7: Discharged or dismissed more than 4 years ago

 

Chapter 13: Discharged more than 2 years ago and filed more than 4 years ago OR dismissed more than 4 years ago

 

Chapter 11: discharged or dismissed more than 4 years ago

 

 

 

 

 

 

 

 

7 years from the date shown on the credit report

 

 

 

 

 

 

 

 

 

These must be paid in full.

 

 

 

 

 

 

 

FHA

 

 

 

 

 

 

 

As low as 500, but Rocket Mortgage and many other lenders require 580

Chapter 7: Discharged or dismissed more than 2 years

 

Chapter 13: Discharged or dismissed prior to application

 

Chapter 11: Discharged or dismissed 2 years prior to application

 

 

 

 

 

 

 

 

3 years from the date of credit report

 

 

 

 

 

 

 

You can pay them in full or be on a repayment plan under certain circumstances.

 

 

 

 

 

 

 

 

 

VA

 

 

 

 

 

 

 

 

No standard minimum, but Rocket Mortgage  requires 620

Chapter 7: Discharged or dismissed 2 years prior to application

 

Chapter 13: Discharged or dismissed prior to application

 

Chapter 11: Discharged or dismissed 2 years prior to application

 

 

 

 

 

 

 

2 years from the credit report date

 

 

 

 

These must be paid in full if they’re showing up on the title. If just on credit, you can have a repayment plan provided you meet qualifications.

It’s worth noting that this table is representative of the guidelines of Rocket Mortgage. Other lenders may have different policies.

Local And Federal Assistance Programs For First-Time Home Buyers

There are various assistance programs and resources that make the home buying process easier for first-timers.

While Rocket Mortgage doesn’t offer any in-house programs, we do accept the following:

  • HomePath Ready Buyer Program:  Fannie Mae offers this product to help first-time home buyers (people who have not owned a home in the past 3 years) purchase foreclosed properties and provides 3% back in closing cost assistance.
  • Home Possible® and HomeReady®: These programs from Freddie Mac and Fannie Mae offer home buyers who make less than 80% of the area median income where they're looking to buy a chance to purchase a home for as little as 3% down without a first-time home buyer restriction.
  • Government and nonprofit grants: The Department of Housing and Urban Development offers a list of state and local home buying programs. You can also look for charitable organizations that will help with the financing of a home.
  • Employer assistance: Some employers offer forgivable loan assistance if you stay with the company for a certain number of years. You might also be able to get assistance from your labor union.
  • Borrowing from retirement funds: After checking with your financial advisor/tax professional for advice, you could take a loan from your retirement funds to be paid back over time on a set schedule and use it for down payments or other mortgage transaction costs.
  • Mortgage credit certificate: This is a state or local government option that is available for low- to moderate-income buyers to take a credit to reduce their tax bill based on their mortgage interest.

Buying A House With Bad Credit

If you decide to buy a house, here are some steps you can take to increase your chance of success.

Speak With Your Home Loan Expert Or Lender

Explain the whole story of your credit issues to your Home Loan Expert or lender. Perhaps you have a high income, and your credit was damaged because of past mistakes, or you were a victim of identity theft.

Lenders can consider these factors and work with you to provide alternative solutions. Make sure you have income and financial documentation with you when you explain your credit issues, as these things may help you build a stronger case.

Apply Individually

If your spouse’s credit score prevents you from qualifying for a mortgage or drives your interest rate higher, you may want to apply for the mortgage solo. Keep in mind that if you apply without your spouse, you may qualify for a smaller loan amount because only your individual income and assets will be factored in.

If your spouse has a relatively high income and low debt, though, it may be smart for you to apply together. A good lender should help you work through these scenarios to determine what is best for you.

Liquidate Assets

If you don’t have the cash for a large down payment on hand, look for assets that you can liquidate without taking large losses. For example, your retirement account could be a source of cash for your down payment (but check with your financial advisor/tax professional first).

Ask Family For Help

Depending on the type of loan you’re applying for, a parent or another non-occupant can co-sign on your mortgage so you can get approved (you may even get a better interest rate). Be sure to ask your lender for details on what’s required for co-signers.

You can also consider funding your down payment with gift money from relatives. However, the amount of gift money you use can affect the mortgage type you qualify for. Learn more about how using financial gifts impacts your loan approval with our guide to using gift money for your down payment.

FAQs About Buying A Home With Bad Credit

Below are some common questions prospective buyers have about preparing their credit for the home buying process.

How can I check and improve my credit score?

Sites like Rocket Homes provide your complete credit report and offer tools to help you expand your credit knowledge. Once you and your spouse have obtained your credit reports and scores, you can take steps to positively impact them.

A simple way to improve your score is to start making your payments on time. Payment history is one of the largest factors used in calculating your credit score. A late payment can stay on your credit report for up to 7 years.

Should I dispute any credit errors if I find them?

Yes. Check your credit report for errors, fraud or unauthorized accounts. According to a 2021 study conducted by Consumer Reports, 34% of volunteers had at least one error and 29% found personal information typos that could be easily corrected.

Learn how to dispute errors on your credit report, and be sure to monitor your score regularly.

Should I pay off my debt before buying a home with bad credit?

Yes, and there are a few ways you can do that. Debt snowballing is based on the idea that you pay off your smallest debt first. This technique gives you the psychological win you need to stay motivated while paying off increasingly larger debts.

On the other hand, if you know you’re the type of person who’s going to stick to something without seeing the rewards right away, the best thing to do is to follow the avalanche method, by which you pay off your highest-interest debt first. This method saves you the most money.

If you plan on applying for a mortgage sooner rather than later, the best thing to do is pay off the loans with the biggest monthly payment. This has the direct effect of lowering your DTI and improving your chances to qualify.

Are large down payments required for bad credit mortgage loans?

It depends. Lenders will typically require a larger down payment if you have a poor credit score and are trying to obtain a conventional loan. However, there are programs available that allow buyers to use a smaller down payment, depending on other factors.

When your loan-to-value ratio is lowered with a larger down payment, the lender’s risk decreases, and you can often reap the benefits with lower interest payments. And if you put 20% down, you can avoid paying private mortgage insurance, which can mean big savings in the long run. In simpler terms, it’s better to have a larger down payment, if possible.

The Bottom Line

If you feel like you’ve been able to use these tips to improve your credit and you’re now ready to move forward and buy a home, apply online with Rocket Mortgage or give us a call at (800) 785-4788.

Apply for a Mortgage with Quicken Loans®

Call our Home Loans Experts at (800) 251-9080 to begin your mortgage application, or apply online to review your loan options.

Start Your Application

See What You Qualify For

Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.