Are there home loans for bad credit?
Home buyers are often surprised by the range of bad credit home loans available today.
Many lenders will issue government-backed FHA loans and VA loans to borrowers with credit scores as low as 580. Some even start at 500 for FHA (though these lenders are harder to find).
With a credit score above 600, your options open up even more. Conventional mortgages require only a 620 score to qualify. And with a credit score of 680 or higher, you could apply for just about any home loan.
In this article (Skip to...)
- Bad credit home loans
- FHA mortgage
- VA mortgage
- USDA mortgage
- Home Possible
- Non-QM mortgage
- Tips to improve your credit
- Bad credit mortgage FAQ
What do mortgage lenders consider a bad credit score?
What constitutes a “bad” credit score will vary between mortgage lenders. But, as a rule of thumb, the FICO scoring model considers scores beneath 580 poor or bad.
- Below 580: Bad credit
- 580 to 669: Fair credit
- 670 to 739: Good credit
- 740 or above: Excellent credit
Still, some home buyers may qualify for a home loan with scores as low as 500, depending on the loan program.
Compare bad credit home loans
Some mortgages are specifically designed to help lower credit applicants get into homes. Here are seven different mortgage options that may work for you:
|Mortgage Type||Minimum Credit Score||Recommended For|
|FHA Loan*||500 (with 10% down) or 580 (with 3.5% down)||Borrowers with credit scores from 500-620|
|VA Loan*||580-620 (varies by lender)||Eligible veterans and servicemembers|
|USDA Loan*||640||Buying a house in a rural area|
|Conventional Loans||620||Borrowers with moderate to good credit|
|Freddie Mac Home Possible||620||Low- to moderate-income borrowers|
|Fannie Mae HomeReady||620||Low- to moderate-income borrowers|
|Non-qualified (Non-QM) Mortgages||500-580||Borrowers who don’t qualify for a conventional or government-backed loan|
*Each lender may have their own overlays for potentially higher minimum credit scores
Seven home loans for bad credit borrowers
These seven mortgage loan programs can all help borrowers with lower credit achieve their goals of homeownership. Yet, the requirements and credit score minimums vary by program.
The best mortgage for you will generally be one that provides flexible qualification guidelines and allows you to comfortably afford monthly mortgage payments.
1. FHA loan: Minimum credit score 500
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 need to pay only 3.5% down.
Those with lower credit (500-579) may still qualify for an FHA loan. But you’d need to put at least 10% down, and it can be harder to find lenders that allow a 500 minimum credit score.
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.
2. VA loan: Minimum credit score 580-620
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.
3. USDA home loan: Minimum credit score 640
USDA loans are popular for their zero down payment requirement and low rates.
You’d 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.
4. Conventional loans: Minimum credit score 620
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:
- Loan-to-value (LTV): LTV is the ratio between the loan amount and home value
- Credit score
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 will require homeowners to have a minimum credit score of 620 in order to qualify for a conventional loan.
Conventional loans are available to lower-credit applicants, but their fees often mean FHA loans cost less for borrowers with bad credit scores.
5. Fannie Mae HomeReady: Minimum credit score 620
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. Plus, you can use additional income from a roommate or boarder to help you qualify for the loan.
Unlike Freddie’s Home Possible program, you don’t have to be a first-time homebuyer to qualify for HomeReady.
6. Freddie Mac Home Possible: Minimum credit score 660
Freddie Mac’s first-time home buyer program, Home Possible, is helping buyers get into homes with a very low down payment and moderate credit.
Home Possible is available for low and moderate-income borrowers and allows for 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 private mortgage insurance (PMI) rates, most lenders will require a 660 or better credit score.
7. Non-qualified mortgage (Non-QM): Minimum credit score 500-580
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 certain 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 that have more flexible rules.
When banks don’t sell their mortgages to investors, they’re free to set their own criteria — like lower minimum credit score requirements.
Thus, 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.
Tips to improve your credit report before home 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: 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.
Improving your bad credit mortgage approval odds
A lower credit score weakens your mortgage application, and it can limit your mortgage options.
To improve your chances of getting approval with bad credit, you can strengthen other aspects of your loan application, including:
- Your DTI: Lenders will check your debt-to-income ratio, or DTI, to see whether you could afford your new mortgage payment. If you could pay off a few debts (or get a raise) before applying, your financial life will look better to lenders
- 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
- Your cash flow: When you can show your lender a steady flow of income for the past two or more years — either through your W-2 forms or tax returns — your application may seem less risky to underwriters. A healthy balance in your savings account looks good, too
- Your choice in 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, underwriters with most lenders will consider your full financial life — not just your credit score — when you apply for a home loan.
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 refinance your mortgage in a few months or years after your credit score improves.
Refinancing could help you replace your existing mortgage with a new one that has a lower rate and better terms, once your finances are looking better.
Bad credit mortgage loans FAQ
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).
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’ll also help if you have few other debts compared to your monthly income.
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.
Credit bureau Experian doesn’t use the term “bad credit,” but it does consider any score below 580 “very poor credit.” Average credit scores range from 580-669; 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.
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.
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.
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.
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.
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.
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.
What are today’s mortgage rates?
Even if you have a lower credit score, there’s a good chance you can still get a low rate and payment in the current interest rate market.
Check your eligibility for one of today’s credit-friendly mortgage programs.