Home loans for bad credit: What you need to know

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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 burden 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 and lenders 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. Most people who take out mortgages have strong credit. The median credit score was 765 for new mortgage originations in the first quarter of 2023, according to a Federal Reserve report.

Only a small percentage of new mortgages were taken out by people with scores below 620.

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.

What is bad credit?

Bad credit generally means credit scores that are below the average score of U.S. consumers. Lenders consider lower credit scores to be a signal of greater risk, and therefore hold back on loan approvals for these applicants or charge them more in interest and fees.

FICO considers credit scores under 580 to be “poor credit.” It defines “fair credit,” which is also below the average American credit score, as scores in the 580 to 669 range.

While getting a home loan with bad credit 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.

Where can I 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, or FHA, works with lenders to help people become homeowners even if their credit scores aren’t strong.

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.

Here are some FHA lenders to consider.

  • New American Funding: This lender offers FHA 203(k) loans for homes that need renovations or repairs.
  • Rocket Mortgage: Rocket Mortgage might be a good fit if you like the idea of an entirely online mortgage process.
  • Movement Mortgage: If you prefer in-person service and more personal attention, you might benefit from Movement’s large branch network.

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.

Here are some VA lenders to consider.

  • Cardinal Financial: If you want to connect to a loan officer during the mortgage process, Cardinal Financial might be a good fit.
  • USAA: A USAA mortgage should be on your radar if you’re already a USAA member or are eligible become one and prefer to work with a lender that focuses the needs of the military community.
  • Veterans United Home Loans: If you hope to improve your credit and take out a VA loan at the same time, you might benefit from Veterans United Home Loans’ free credit counseling service.

USDA loans

Low- to moderate-income borrowers in eligible rural areas may be able to find a loan through the U.S. Department of Agriculture. Plus, you don’t need perfect credit to qualify for a USDA loan.

Some USDA lenders to consider:

  • Pennymac: Pennymac may be a good option if you’re looking for a lender that’s transparent about its rates and offers an instant online rate tool.
  • PNC Bank: If you already bank with PNC or hope to eventually borrow against your home’s equity through a home equity line of credit, a PNC mortgage might be a strong choice.
  • Wells Fargo: Wells Fargo is worth exploring if you’re a Wells Fargo customer and want to choose between an online or in-person mortgage process.

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 increase your chances of mortgage 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 a home, lenders may see a loan for you as less risky.

It’s ideal to target a down payment of at least 20% of the home purchase price because that lets you avoid the cost of PMI, or private mortgage insurance. But the more you can put down the better. Do your best to save as much as you can for a down payment.

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.

Improve your debt-to-income ratio

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.

A good rule of thumb is to ensure your debt-to-income ratio for a mortgage lender is 36% or less. Remember, your mortgage is part of this ratio.

Take steps to improve your credit

Boosting your credit is one of the best ways 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. Another tip is to only apply for new credit when you absolutely need it, so lenders don’t think you’re in a cash crunch.

Next steps: 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 should have emergency savings, since becoming a homeowner means facing surprise home expenses from time to time, like a fallen tree or broken water heater.


Can I get an FHA loan with a 500 credit score?

You might be able to get approved for an FHA loan with a credit score of 500. But you’ll need a down payment of at least 10%.

What is the lowest credit score to get a home loan?

Most conventional mortgages require a minimum credit score of 620. But you might be able to take out a government-backed loan, like an FHA loan with a lower score.

Can you still get a mortgage with a low credit score?

Yes, you may be able to qualify for a mortgage with a low credit score. An FHA loan, for example, allows lenders to approve borrowers with scores as low as 500 as long as they have a 10% down payment.

Do certain mortgage companies work with lower credit scores?

There are mortgage lenders that say they approve borrowers with lower credit scores. A couple of examples include Caliber Home Loans and Cornerstone First Financial.

What do mortgage companies consider a low credit score?

Credit scores below 620 are often classified as low by mortgage lenders, and you’ll likely have a more difficult time qualifying for a home loan.

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.