You can find a home loan with bad credit — but should you take it?

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In a Nutshell

You may be able to find a home loan with bad credit, but that doesn’t necessarily mean you should apply and take the loan. Before you commit, consider if it’s the right time to purchase a home — and if you’re ready, shop carefully to make sure you’re getting the best deal available to you.
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Buying a house is a big investment, but it can also turn into a financial disaster if you end up with the wrong mortgage.

Homeownership can help you build wealth. But if high interest rates and unfavorable terms mean you’ll struggle to repay your mortgage — or worse, default on the loan — buying a home could actually undermine your financial well-being.

It’s possible to find a manageable mortgage with bad credit, but you need to know what to look for and how to avoid loans that will be difficult for you to repay.

We’ll review what you should consider and some different types of loans that may be a good fit depending on your circumstances.

Can I buy a house with bad credit?

When you apply for a mortgage, lenders will check your credit scores. While you have many credit scores from different credit-reporting agencies, many lenders use FICO scores, which can range from 300 to 850 for base scores and 250 to 900 for industry-specific scores. These may not be the scores your lender uses when reviewing your credit, but they can give you a better idea of where you stand.

Most people who take out mortgages have strong credit. The median credit score was 788 for new mortgage originations in the first quarter of 2021, according to a Federal Reserve report. Only a small percentage of new mortgages were taken out by people with scores below 620.

While getting a home loan with scores in the low 600s is possible, the Consumer Financial Protection Bureau warns that these loans often come with very high interest rates and could put borrowers at risk of default. Because applying for a mortgage with bad credit could mean you only qualify for a loan that may be difficult to pay back, it might be smart to wait to buy a home until your credit scores improve.

Who will finance a home with bad credit?

While many mortgage lenders don’t offer loans to people with bad credit, some lenders do lend to people with lower scores.

You may hear these types of loans referred to as “subprime mortgages,” which essentially means you’re paying a higher interest rate than a “prime” mortgage because lenders see the loan as riskier. You may only have the option to take out an adjustable-rate mortgage — where the rate can change over time.

While avoiding subprime loans is important because of the risks, finding an affordable mortgage with bad credit is possible.

FHA loans

The Federal Housing Administration works with lenders to help people become homeowners even if their credit scores aren’t very good. The FHA insures loans that lenders make to riskier borrowers so that lenders can offer financing at lower rates and with better terms.

FHA loans allow borrowers with down payments as low as 3.5% to qualify for mortgage loans, as long as their credit scores are 580 or higher. For homebuyers with scores between 500 and 579, it’s still possible to obtain a mortgage guaranteed by the FHA, but a minimum 10% down payment is required. For example, if you’re buying a $200,000 home, you’ll have to make at least a $20,000 down payment. If your scores are below 500, you can’t qualify for an FHA-insured home loan.

VA loans

Eligible veterans, current service members and surviving spouses of service members may be able to qualify for a home loan through the Department of Veterans’ Affairs.

VA loans are offered by private lenders, but the VA guarantees a portion of the loan, which can result in more-favorable terms. You may be able to qualify with lower credit scores or even a past bankruptcy. You also may qualify with no down payment.

USDA loans

And low- to moderate-income borrowers in eligible rural areas may be able to find a loan through the U.S. Department of Agriculture.

You don’t need perfect credit to qualify for a USDA loan.

State and local programs

Some states also offer programs to facilitate homeownership by offering eligible borrowers the opportunity to get a home loan with bad credit. For example, the State of New York Mortgage Agency provides help to first-time homebuyers. There’s no minimum for credit scores for SONYMA loans, although there are other eligibility requirements.

Check with your local or state housing department to see if it offers a program you may qualify for.

How to find a mortgage with bad credit

Anyone who shops for a mortgage, regardless of where their credit scores land, should compare rates and terms from different lenders. This is especially important when your credit makes it difficult to find a mortgage loan with affordable terms. You can compare loans from different types of lenders, like …

  • Mortgage companies
  • National and community banks
  • Credit unions

Mortgage brokers can compare rates for you to match you with a lender based on your needs, but they aren’t required to find you the best deal unless they’re acting as your agent under contract. Brokers also typically charge a fee for services, which could be paid at closing or could come in the form of a higher interest rate. This fee may be separate from other mortgage-origination costs or other fees. And it can sometimes be difficult to tell if you’re working with a lender or a broker, so be sure to ask.

When you have bad credit, many lenders may be unwilling to work with you, or you may find interest rates are prohibitively high from lenders who are willing to offer you a loan. To find lenders offering FHA loans that might have better terms, use the Lender Search List made available by the U.S. Department of Housing and Urban Development.

Should you take out a mortgage with bad credit?

Through the lender’s mortgage application process, you’ll find out if you’re eligible for financing. But being approved for a loan doesn’t necessarily mean you should take it. In fact, there are some circumstances where you should probably decline to borrow.

You may not want to borrow …

  • If your mortgage payments will exceed around 30% of your monthly income. It might be difficult for you to afford the payments, which could put you in a position that risks foreclosure.
  • If you’re offered a mortgage only at a very high interest rate. You’ll make higher monthly payments, and your loan will cost more over time than if you can wait until your credit improved enough to get a better deal.
  • If your credit scores are low because you have trouble paying bills or have a lot of debt. Instead of adding another major financial obligation, you may want to wait until your debt is under control.

You should also consider your general financial readiness to buy a home before committing to a mortgage. For example, you’ll want to have a down payment and money to cover closing costs ready to go before signing on the dotted line. You may also want to have emergency savings, since becoming a homeowner could mean facing surprise home expenses someday, like a fallen tree or broken water heater.

How to increase your chances of approval

If you’re hoping to get a reasonable mortgage with bad credit, there are a few things you can do to try to boost your odds of getting approved.

  • Save a larger down payment. If you put more money down on the home, it may not be as risky for a lender to give you a loan.
  • Get a co-signer. A co-signer agrees to take legal responsibility for repaying the loan if you can’t. But asking someone to be a co-signer is a big deal, because if you don’t pay, the lender can try to collect from the cosigner. Still, close family members or friends may be willing to take the risk.
  • Pay off other debts. The amount of debt you already owe compared to your income is a key factor in determining if you’ll be approved for a mortgage loan. If you have little existing debt and your income is high enough to afford your mortgage, getting approved can be easier.
  • Take steps to improve your credit. Boosting your credit is one of the best way to improve your chances of being approved for a loan — and with better terms. One way to help improve your credit is by checking your credit reports for mistakes and disputing any incorrect information. Paying off debt to keep your credit utilization below 30% and making on-time payments can also help improve your credit.

Choosing a lender offering FHA loans could also boost your likelihood of being approved, because qualifying requirements are less stringent.

Next steps: Explore alternatives if you can’t get a mortgage with bad credit

If you’re frustrated by the difficulty of getting a home loan with bad credit, you may wonder if you can buy a home using other sources of funding, such as personal loans.

Mortgage lenders typically don’t allow borrowers to take out a personal loan for a down payment. Most lenders will want to know what the loan is for, and may not want to give you the loan for the purpose of purchasing real estate. And even if they do, paying for a home with a personal loan means you won’t get the tax benefits associated with a mortgage, such as the ability to deduct mortgage interest when itemizing federal income tax deductions. On top of that, personal loans typically have higher APRs, which means you’ll likely end up paying more in interest over the life of the loan.

If you can qualify for a smaller mortgage and afford a less-expensive home, you might want to consider buying a fixer-upper and using a personal loan to make improvements after the home has been purchased.

You could also consider using a personal loan to consolidate and pay down high-interest debt more quickly. By repaying debt and making payments on time, you can lower your credit utilization and build a positive payment history, which can improve your credit. Both of these things can help you qualify for a mortgage more easily.

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.