Buying a home is a dream for many, but if you have bad credit, you might worry that securing a mortgage is impossible. The good news is that you can still get a home loan with bad credit, but it may take extra effort and the right strategy.
In this guide, we’ll walk you through how to qualify for a mortgage with bad credit, the best loan options available, and tips to improve your chances of approval.
Understanding Credit Scores and Their Impact on Home Loans
Lenders use credit scores to determine your risk as a borrower. The most common scoring system is FICO, which ranges from 300 to 850. Here’s how different scores affect your mortgage eligibility:
| Credit Score Range | Rating | Loan Eligibility |
|---|---|---|
| 750 – 850 | Excellent | Best interest rates, easy approval |
| 700 – 749 | Good | Competitive rates, easier approval |
| 650 – 699 | Fair | Higher rates, fewer lender options |
| 600 – 649 | Poor | Limited loan options, higher interest |
| 300 – 599 | Very Poor | Difficult to get approved |
What Credit Score Do You Need to Buy a House?
Most lenders prefer a credit score of 620 or higher for conventional loans. However, government-backed loans like FHA and VA loans allow approvals with scores as low as 500-580.
Best Home Loan Options for Bad Credit
If you have bad credit, consider these mortgage options:
1. FHA Loans (Best for Low Credit Scores)
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Minimum Credit Score: 500-580
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Down Payment: 3.5% (if score is 580+), 10% (if score is 500-579)
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Backed by: Federal Housing Administration (FHA)
FHA loans are ideal for first-time homebuyers with low credit scores. They come with flexible qualification requirements and lower down payments.
2. VA Loans (Best for Veterans & Military Members)
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Minimum Credit Score: No set requirement (most lenders prefer 580-620)
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Down Payment: 0%
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Backed by: U.S. Department of Veterans Affairs
If you’re a veteran, active-duty service member, or eligible spouse, a VA loan can help you secure a mortgage with no down payment and no private mortgage insurance (PMI).
3. USDA Loans (Best for Rural & Suburban Homebuyers)
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Minimum Credit Score: 580-640
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Down Payment: 0%
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Backed by: U.S. Department of Agriculture (USDA)
USDA loans are designed for buyers in rural and some suburban areas. They require no down payment, but you must meet income limits.
4. Conventional Loans (For Higher Credit Scores & Large Down Payments)
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Minimum Credit Score: 620+
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Down Payment: 3%-20%
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Backed by: Private lenders (not government-backed)
If your credit score is above 620, you may qualify for a conventional loan. However, these loans require a higher down payment and stricter credit requirements.
5. Subprime Mortgages (Risky but an Option)
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Minimum Credit Score: Varies (usually below 620)
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Down Payment: Higher than standard loans
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Higher Interest Rates: Yes
These loans are provided by lenders that specialize in high-risk borrowers. However, they often come with very high interest rates and unfavorable terms, so proceed with caution.
How to Improve Your Chances of Getting Approved
Even with bad credit, you can take steps to boost your approval odds and get better loan terms.
1. Save for a Larger Down Payment
A larger down payment (10%-20%) reduces lender risk and increases your chances of approval. It can also lower your mortgage interest rate.
2. Work on Improving Your Credit Score
If you increase your score by even 20-50 points, you may qualify for better mortgage options.
Quick Ways to Improve Your Credit Score:
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Pay off overdue debts
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Lower your credit card balances (keep utilization below 30 percent)
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Dispute any errors on your credit report
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Make all future payments on time
3. Reduce Your Debt-to-Income (DTI) Ratio
Your debt-to-income ratio (DTI) is the percentage of your income used to pay debts. Lenders prefer a DTI below 43 percent.
How to Lower Your DTI:
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Pay off small debts before applying
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Avoid new loans or credit cards
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Increase your income (if possible)
4. Get a Co-Signer
A co-signer with good credit can help you qualify for a loan by adding their financial strength to your application. However, they’ll be responsible for your loan if you fail to make payments.
5. Look for Lenders Who Specialize in Bad Credit Loans
Some lenders focus on helping borrowers with low credit scores. These lenders may offer manual underwriting, where they consider factors beyond just your score, like rental payment history and job stability.
Alternatives If You Can’t Get a Mortgage Right Now
If lenders reject your application, don’t lose hope. Here are other ways to get closer to homeownership:
1. Rent-to-Own Agreements
In a rent-to-own agreement, you rent a home with the option to buy after a set period. A portion of your rent goes toward the future down payment.
2. Build Your Credit and Reapply Later
If you’re not in a hurry, spend 6-12 months improving your credit score and then reapply for a mortgage.
3. Find a Seller Who Offers Owner Financing
Some home sellers are willing to finance the purchase themselves instead of using a traditional lender. This can be an option if you can negotiate favorable terms.