How To Get a Bad Credit Home Loan
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Consumers in search of bad credit home loans may be surprised to discover they have multiple options. While homebuyers with excellent credit qualify for mortgages with the most favorable terms, there are several programs and loans available for prospective homeowners buying a home with bad credit.
Can you get a bad credit home loan?
Yes, it is possible to get a bad credit home loan. But first, it’s worthwhile to understand how mortgage lenders evaluate credit scores and other financial information for those buying a house with bad credit. In addition, it’s crucial to understand what’s considered “bad” credit.
When you apply for a home loan, lenders will look at your credit scores and your overall financial picture. While specific mortgage requirements vary by lender and loan program, bad credit in mortgage lending usually means having a score near the minimum allowed for a particular loan. It could also mean your credit history shows one or more of the following:
Getting a bad credit home loan with a low credit score
While your credit score is just one factor mortgage lenders will consider when you’re buying a home with bad credit, it’s weighed heavily because it represents your risk to lenders. There are multiple credit scoring models, but most lenders use FICO® Scores — created by the Fair Isaac Corporation. A general FICO Score ranges from 300 to 850, with the average score landing at 711. Here’s a look at the classification of the FICO Score:
5 loan options for buying a house with bad credit
Recently, the median FICO Score for newly originated mortgages hit 786, which is higher than the average credit score. Fortunately, buyers with scores well below those numbers or with adverse events in their credit history can pursue homeownership through one of these low credit score home loans.
|Loan Program||Minimum credit score||Minimum down payment||DTI Ratio*|
|VA loans||None, but most lenders look for 620||No down payment required||41%|
|USDA loans||None if going directly with the USDA; 640 when using a USDA-approved lender||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.
A mortgage insured by the Federal Housing Administration (FHA) can be a solid option when buying a house with bad credit because 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; you’ll need a 580 credit score to make the minimum down payment of 3.5%.
FHA loans also provide shorter waiting periods after major credit issues — such as foreclosures, bankruptcies, judgments or tax liens — than conventional loans. To offset the lenient borrower requirements, FHA loans come with two types of mortgage insurance premiums, upfront and annual.
Available to active-duty service members, veterans and eligible spouses, VA loans, which are backed by the U.S. Department of Veterans Affairs (VA), require no down payment. While there is no minimum credit score for VA loans, most lenders usually look for a score of 620 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.
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, such as 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 down payment of 5% is required for those without a score; otherwise, the minimum is 3%. Borrowers will need to pay PMI for down payments below 20%.
Boosting your approval chances for a bad credit mortgage
Fortunately, even if you have a low income, a poor credit score or negative marks in your credit history, you can bolster your chances of getting a home loan with bad credit.
Know 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 — Equifax, Experian and TransUnion — at AnnualCreditReport.com and review them for errors before looking into bad credit home loans. If you spot any incorrect information, you can follow these procedures to submit a dispute and get the error removed from your reports.
Increase your down payment
Putting more money down will go a long way toward getting approved, as it demonstrates to lenders that you’re able to put money toward the mortgage. 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 also improve your mortgage rate.
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, such as tax refunds or bonuses, towards your down payment. In addition, 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.
Pay down debt and lower your DTI
One factor lenders review when deciding whether to approve you for a loan is your 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 want to shoot for a ratio that’s no greater than 43%. DTI requirements do vary by loan and lender, however.
One way to lower your DTI is to pay down some of your debts; another option is to increase your income. Either method can help improve your DTI.
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 to your loan terms.
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 that you could qualify for. Be sure to consider options from multiple lenders and compare rates and terms.
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 someone with excellent credit. A higher interest rate means a more expensive loan in the long run.
Here’s an example of how a low credit score can impact the interest rate and total loan amount on a $350,000, 30-year fixed-rate mortgage. Our example doesn’t factor in property taxes, homeowners insurance, mortgage insurance or other fees.
(principal and interest only)
|Total interest paid||Total loan cost|
|760 – 850||2.758%||$1,430||$164,918||$514,918|
|700 – 759||2.980%||$1,472||$179,863||$529,863|
|680 – 699||3.157%||$1,505||$191,949||$541,949|
|660 – 679||3.371%||$1,547||$206,762||$556,762|
|640 – 659||3.801%||$1,631||$237,178||$587,178|
|620 – 639||4.347%||$1,742||$277,020||$627,020|
|600 – 619||4.893%||$1,856||$318,180||$668,180|
|580 – 599||5.439%||$1,974||$360,599||$710,599|
As you can see, the differences between credit score ranges are just fractions of an interest point. However, over the life of the loan, those minor differences add up. In our example, a borrower with a 580 credit score would pay $42,419 more on the loan than a borrower with a 600 credit score. Depending on your circumstances, waiting and improving your credit score instead of buying a house with bad credit could result in significant savings.
FAQs about bad credit home loans
What is considered a bad credit score?
There are multiple credit scoring models, so classifications of scores vary. However, the most widely used credit scores are FICO Scores, which generally ranges between 300 and 850. On the FICO scale, scoring below a 580 credit score is rated as “poor.”
Will I pay more in closing costs with bad credit?
Your closing costs will depend on the type of loan you get, the price of the property you’re purchasing and other factors. For example, VA loan borrowers will need to pay a funding fee, while FHA loan borrowers will pay an upfront mortgage insurance premium. Borrowers may be able to roll such fees into their loan amount.
Will I have higher mortgage insurance premiums with bad credit?
Buying a house with bad credit doesn’t automatically mean you’ll pay higher mortgage insurance premiums — the type of loan you have and how much you put down will determine that. For example, all FHA loans come with two types of mortgage insurance premiums, upfront and annual. Conventional loan borrowers who put down less than 20% will pay a similar fee — private mortgage insurance — regardless of credit score.
Should I get a cosigner for my mortgage?
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.
Can I refinance a bad credit home loan?
Yes, you can refinance a bad credit mortgage, but be sure to familiarize yourself with your specific loan terms. If your credit has improved since buying a home with bad credit, you may qualify for a lower rate or a mortgage with better loan terms. Keep in mind that you’ll have refinance closing costs, so you’ll need to consider whether a refi makes financial sense.
Can I buy a home after going through bankruptcy?
Yes, you can get a mortgage after filing for bankruptcy. However, you’ll first need to go through a waiting period, which can range from 12 months to four years, depending on the loan program and type of bankruptcy you filed.
Can I get a mortgage after foreclosure?
If you’ve had a mortgage foreclosure, you’ll have to wait longer than you would after any other credit issue. Waiting periods range from two to seven years. If 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.