How To Get A Home Loan With Bad Credit: Your Mortgage Options

13 Min Read
Updated March 9, 2024
FACT-CHECKED
Written By
Victoria Araj
Small yellow house.

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.

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.

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

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. However, conventional loans aren’t the only types of loans available for homeowners. There are several programs that make it possible to buy a home with a score as low as 500. We’ll discuss some loan options and the scores you’ll need below.

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Credit Scores Needed To Buy A House

Before going into how to get a home loan with a bad credit score, 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.

Let’s take a look at the credit score ranges and what they might mean for your 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.

740 – 799

Very Good

While not at the very top of the mountain, 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 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.

How Is Your Credit Score Determined By Mortgage Lenders?

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 from government-backed mortgage company Fannie Mae.  With these loans, when there are two or more borrowers. Fannie Mae uses the average of the borrowers’ median scores in order 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.

Can You Buy A House With Bad Credit?

Yes, it’s possible to buy a house with bad credit. While it may not be easy to get a home loan with bad credit (FICO® Score under 620), you do have options. If you have a credit score of 580 or above, you’ll have an easier time finding a lender, however, there are home 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.

How To Get Approved For A Mortgage With Bad Credit

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

1. Check Your Credit Score

Before you talk to a lender or submit a loan application, you need to know what your current credit score is. Even if you think you know, you could be surprised to see what’s on your report. Past-due medical bills, outstanding credit card balances and even unpaid subscription fees can all end up hurting your score.

Make sure you know where you stand by checking your credit report before beginning the home buying process. This step allows you to assess your history, figure out how you can improve your score or catch and correct any errors that may show up.

2. Lower Your Debt-To-Income Ratio (DTI)

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.

Paying off outstanding debts will help lower your DTI and show lenders you have enough monthly income to cover your mortgage payments. Paying down your credit card debt can also reduce your credit utilization, which improves your chances of getting approved for a mortgage.

Most banks, credit unions and online financial institutions want to see that you’re a trustworthy borrower and responsible homeowner who will make their mortgage payments on time. By reducing any outstanding balances or debts ahead of time, you’re showing prospective lenders that you’ll be motivated to also pay off your mortgage.

3. Speak With Your Lender

Explain the whole story of your credit issues to your mortgage broker 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. It’s best to be upfront about your financial past. Your lender will be taking a close look at your financial history during the underwriting process so it’s best not to leave anything out and risk being denied.

Being upfront with your lender could persuade them to work with you and 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.

4. 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.

5. 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 401(k) retirement account could be a source of cash for your down payment (but check with your financial advisor/tax professional first).

6. 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.

Find out if an FHA loan is right for you.

See rates, requirements and benefits.

Home Loan Options For Home Buyers With Bad Credit

FHA and VA loans are two mortgage programs that you’ll want to look into if you’re applying for a mortgage with a low credit score. Let’s take a look at these loan options, their features and what you can expect.

FHA Loans

If you have a lower credit score, an FHA loan may be right for you. The Federal Housing Administration (FHA) 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. Let’s take a look at a few common guidelines around FHA Loans you’ll want to keep in mind when applying:

  • Down payments: If you have a median credit score of at least 580, your down payment can be as low as 3.5%. You may 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%.
  • Bankruptcies: 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. You can use the chart in the next section to explore your options. Don’t forget to ask your lender for specific details.
  • DTI: An FHA loan also allows you to have a higher DTI 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.
  • Mortgage insurance premium (MIP): Keep in mind with an FHA loan 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%, but you’ll still pay it for at least 11 years (unless you refinance to a conventional mortgage once you’ve reached 20% equity in your home).

At Rocket Mortgage you need a minimum credit score of 580 to qualify for an FHA loan.

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 (VA) backs these loans, they have less stringent credit guidelines.

 

Although some lenders may have a number in mind, the VA has no standard required credit score for a VA loan. With Rocket Mortgage, you’ll need a minimum credit score of 580. 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 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 be:

  • Currently serving in the United States military
  • An honorably discharged veteran
  • A qualifying 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

Finally, you need to meet minimum service time requirements that can vary based on how you serve. The exception to this is if you’re discharged due to a service-connected disability.

Guide to VA Loans

Guide to VA Loans

Discover a more affordable loan option for United States Veterans, Service Members and spouses.

Understanding Loan Options For Less-Than-Perfect Credit

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

Mortgage Type

Qualifying Credit score

Judgements and Tax Liens

Foreclosure

Types of Bankruptcy

Waiting period

Conventional loans

620

These must be paid in full

7 years from the date on your credit report

Chapter 7

4 years

Chapter 11

4 years

Chapter 12

2 years, if discharged and filed 4 years prior

        OR
4 years, if dismissed

Chapter 13

2 years, if discharged and filed 4 years prior

        OR
4 years, if dismissed

FHA Loans

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

Paid in full or on a qualifying repayment plan

3 years from the date of credit report

Chapter 7

2 years

Chapter 11

2 years

Chapter 12

Discharged or dismissed before applying

Chapter 13

Discharged or dismissed before applying

VA Loan






No standard minimum, but Rocket Mortgage  requires 580

Paid in full or on a qualifying repayment plan

2 years from the credit report date

Chapter 7

2 years

Chapter 11

Discharged or dismissed before applying

Chapter 12

Discharged or dismissed before applying

Chapter 13

Discharged or dismissed before applying

FAQs

Now that you have a bit more information about what it takes to get a home loan with bad credit, you’ve probably got a few questions about next steps and common issues. Let’s take a look at some commonly asked questions about the mortgage process.

What other factors do mortgage lenders consider?

Besides your credit score, lenders consider other qualification factors when you apply for a mortgage. Here are a few factors that lenders consider when you apply for a mortgage:

 

Will a larger down payment help me get a loan with bad credit?

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. If you don’t think you’ll be able to put down a large amount of money, you could try to apply for down payment assistance instead.

What debt-to-income ratio (DTI) do I need to qualify for a mortgage?

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 you could qualify for. Your DTI is one way that banks decide your creditworthiness.

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

Could a co-signer help me get a home loan with bad credit?

Having a co-signer can help you qualify for a mortgage. When someone co-signs a loan with you, their income, credit and assets can be used to help you qualify. The extra income can lower your DTI and show funds for a down payment. In certain limited situations, your DTI and cash reserves can impact the actual interest rate you get due to pricing adjustments on certain financing types.

However, make sure whoever you use as a co-signer has good credit. Lenders will look at the co-signer’s lowest FICO® Score in order to qualify you for a mortgage. If your co-signer has a lower credit score than you, including them on the application could harm your chances more than helping.

Are there assistance and loan programs for first-time home buyers?

There are various first-time home buyer assistance programs and resources that make the home buying process easier for first-timers and those with bad or fair credit. While Rocket Mortgage doesn’t offer any in-house programs, we do accept the following:

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 will 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 towards home ownership now – Rocket Mortgage can help you on your home buying journey.

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