Updated: December 12, 2024
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Getting a mortgage with bad credit might be challenging but not impossible. While poor credit can lead to higher interest rates and less favorable terms, it doesn’t automatically disqualify you from pursuing a home loan.
However, improving your credit score before applying can lead to better mortgage options and savings in the long run. We’ll explore how to get a mortgage loan with bad credit, offering strategies and insights to help you on your path to homeownership.
You can get a mortgage with bad credit through programs like FHA and VA loans.
Save for a larger down payment and consider a co-signer to improve your chances of approval.
Pay down credit card balances to lower your credit utilization ratio, boosting your credit score and securing better mortgage terms.
According to the Federal Reserve Bank of New York, the median credit score for mortgage borrowers was 770 as of the fourth quarter of 2023. That indicates that most borrowers have very good credit; however, if yours isn’t ideal, securing a mortgage is still possible.
Yes, you can buy a house with bad credit. Different types of loans, such as FHA loans and some conventional loans, offer options for those with less-than-perfect credit. However, a bad credit mortgage may come with higher interest rates and fewer choices. Improving your credit score can expand your loan options and lower your costs.
Mortgage lenders check your credit score when you apply for a mortgage to assess your risk as a borrower. If you have bad credit, which FICO defines as below 580, you may face higher interest rates and more stringent terms. However, mortgage loans for bad credit are available, though the borrowing process might be more challenging than those experienced by borrowers with higher credit scores.
The best approach is to understand how credit scores affect mortgage rates when applying for a home loan. Your credit score directly impacts the interest rate you'll receive, which influences your monthly mortgage payment. A higher credit score typically results in a lower mortgage rate, making your loan more affordable over time.
Even with bad credit, a larger down payment can help secure a better mortgage rate. For example, in Texas, borrowers looking to get a 30-year fixed-rate mortgage with credit scores below 680 may qualify for an APR of 8.01% if they put in a down payment between 5% and 20%. However, if the down payment exceeds 20%, the APR becomes 7.25%.
Explore the table below to see the APRs you might qualify for in your state with a credit score below 680.
| 20% or higher | 6.01% |
Where did we get this data?
This data is from Zillow and is updated as of July 2024.
Finding mortgage loans for bad credit may seem challenging, but various options are available to finance your home purchase. Although terms may be less favorable, you can still secure a mortgage. Explore the table below for different loan options that cater to borrowers with bad credit.
Mortgage Option | Credit Score Requirement | Consideration for Those with Bad Credit |
|---|---|---|
Typically 620 or higher | May require a larger down payment and higher interest rates. | |
Typically 500 or higher | Offers lower credit score requirements but includes mandatory mortgage insurance premiums, increasing monthly payments. Borrowers with scores below 580 have to put a minimum of 10% down. | |
No specific minimum | More flexible with credit scores, but only available to eligible veterans and active-duty military members. | |
Typically 640 or higher | Designed for rural areas; bad credit may limit eligibility and result in higher interest rates. |
Learning how to get a mortgage with bad credit is essential since it can be more challenging than having good credit. For example, you might face higher interest rates and stricter terms. However, it is still possible to secure a loan. Explore the tips below to improve your chances of getting approved for a mortgage with bad credit.
A substantial down payment reduces the lender's risk, making them more likely to approve your mortgage. FHA loans are more accessible for those with bad credit, requiring as little as 3.5% down for credit scores as low as 580. If your score is 500, prepare at least a 10% down payment.
Some lenders specialize in bad credit mortgages and offer more flexible terms. Research and compare different lenders to find one that fits your needs.
Money in savings accounts, investment accounts, stocks, bonds and CDs increases your net worth. Lenders view substantial assets as a sign of financial stability, indicating you can keep up with mortgage payments even if unexpected expenses arise or you face a temporary loss of income.
A co-signer with good credit can strengthen your mortgage application by reducing the lender's risk. Ensure they understand the responsibility involved.
Mortgage brokers can help you find lenders willing to work with borrowers with bad credit. They have access to various loan products and can guide you through the application process.
Paying down existing debt can improve your debt-to-income ratio, showing lenders you have sufficient income to handle monthly mortgage payments.
Although this guide doesn't cover specific methods, improving your credit score over time can expand your mortgage options and potentially secure better loan terms.
Improving your credit score before applying for a mortgage can lead to better loan terms and lower interest rates, saving you money over time. Balance this benefit with the possible risk of delaying your home purchase. However, if it’s your best bet, here are some steps to take to boost your credit score:
Obtain a free copy of your credit report and review it for any mistakes. Dispute inaccuracies, such as incorrect account details or late payments, to improve your credit score quickly.
Reduce your credit card balances to lower your credit utilization ratio. For example, if your credit limit is $5,000 and your balance is $2,500, paying it down to $1,000 can boost your score.
Ask a trusted friend or family member to add you as an authorized user on their credit card. If they have a good payment history, your credit score can be pulled up even if you don’t use the card. Make sure that the person adding you has a spotless payment history with no late payments and consistently maintains low credit utilization.
Set up automatic payments or reminders to ensure all bills are paid by their due dates. Consistent on-time payments can significantly improve your credit score over several months.
Each new credit inquiry can lower your score slightly. Avoid applying for new credit cards or loans while working on improving your credit to maintain a stable score.
If you have any accounts in collections, only pay them off if the creditor agrees to remove the negative mark from your credit report. This can improve your score once the debt is settled.
Having a mix of credit accounts, such as credit cards, auto loans and mortgages, can positively impact your score. Manage these accounts responsibly to demonstrate your creditworthiness over time.
Securing a bad credit mortgage may lead to a different experience than if you had good credit. We addressed some common concerns to help you make financially smart decisions about your mortgage options.
You can get a mortgage with bad credit. Specific loan programs, such as FHA or VA loans, are designed for borrowers with lower credit scores.
The lowest credit score typically allowed for an FHA loan is 500, but you will need a 10% down payment. For most other loans, a minimum score of 620 is usually required.
FHA loans are often considered the easiest home loans for bad credit due to their lower credit score requirements and flexible terms.
You can get an FHA loan with a 500 credit score, but it requires a 10% down payment. Other loan options may not be available with such a low score.
Save for a larger down payment, increase your savings and consider a co-signer. Don’t forget that there are other strategies you can apply to improve your chances.
About Zachary Romeo, CBCA
Zachary Romeo is a certified Commercial Banking and Credit Analyst (CBCA), and the Head of Loans and Banking at MoneyGeek. Previously, he led production teams for some of the largest online informational resources in higher education, with over 13 years of experience in editorial production.
Romeo has a bachelor's degree in biological engineering from Cornell University. He geeks out on minimizing personal debt and helping others do the same through people-first content.
