How to Get a Mortgage with Bad Credit
When you submit a mortgage application to a lender, the underwriter will review your financial information to determine whether you’re likely to repay the loan. They’ll examine your credit report, which contains your credit history, types of debt, and payment history, to see how well you’ve managed debt in the past and gauge whether you’re likely to repay a mortgage. Your credit score indicates how good your credit is, with the average FICO score slightly dipping to 718 in 2024.
Your credit score will decide which loans you are eligible for and what interest rate you can expect. With certain loan types, it will also determine how much you’ll need for a down payment. Over time, you can take steps to improve your credit score, but if you’re shopping for a home now, there are several government-back programs you can qualify for with a lower score.
Whether your credit score is considered too low to buy a house depends on the loan and, in some cases, the size of your down payment. The FICO credit scoring model will give you a good indication of where your score stands:
Another scoring model, VantageScore, categorizes scores in a similar way:
According to the most recent National Survey of Mortgage Originations, from the second quarter of 2023, 26.3% of respondents who took out a new mortgage loan had an excellent VantageScore, between 781 and 850. Here’s how other respondents’ scores stacked up:
Each type of mortgage loan has its own eligibility criteria, including credit score. The main types are conventional loans, which are backed by private lenders, and government loans, which are backed by government agencies but processed by private lenders. The Federal Housing Agency (FHA) sets the credit score requirements for FHA loans, a popular option if you have a lower credit score. Other government loans don’t have credit score requirements set by the administration, so you’ll need to check with your lender to see if you qualify. Here are the credit score requirements for the most common loan types:
You’ll typically need a recent history of on-time payments, especially housing payments, to be approved for a mortgage. If you have that, you could be approved even if you have a low credit score as long as you opt for a government-backed loan.
FHA loans are the most popular type for borrowers who don’t qualify for a conventional loan or decide against one for some other reason. You can qualify with a credit score as low as 500.
VA loans are often the best choice for eligible veterans and active-duty service members, even if they have good credit. But the absence of VA-mandated credit minimums means you might find a lender willing to originate your loan even if your credit score is less than 620. VA loans have one additional benefit — you don’t need a down payment to qualify.
USDA loans are another option for borrowers with low credit scores and income at or below 115% of the median household income for their area. There are also no down payment requirements for this type of loan. You must be buying property defined as “rural” by the USDA. You can use the USDA’s property eligibility map to check if a property qualifies.
Every conventional and government-backed loan requires the lender to verify that borrowers are willing and able to repay. Depending on its risk tolerance, a lender might turn down applications from homebuyers with bad credit. You can take steps to strengthen your mortgage application:
Apply with a cosigner: A friend or family member can cosign your mortgage loan. They would need to meet credit, income, and other eligibility criteria — and be willing to repay the loan on a home they don’t own in the event they’re unable to make the payments.
Save a larger down payment: A larger down payment can improve your chances of being approved for a mortgage loan. That’s especially true with an FHA loan. Increasing your down payment from 3.5% to 10% lets you borrow with a score of just 500 vs. 580. You’ll also save on interest because every dollar of your down payment is a dollar you don’t have to borrow.
Wait until you qualify: As hard as it is to wait, the best option might be to hold off until you can improve your credit enough to qualify for a loan and a good rate. In addition to reducing your risk of default, qualifying for a better loan and a better rate can save you tens of thousands of dollars in interest and fees over the life of your loan.
Putting a home purchase on hold gives you time to get your finances in order, starting with your credit score. Following these steps can result in small changes almost right away and big improvements over time:
How long it takes to improve credit depends on the reasons for the low score and the steps you take to resolve them. Paying down or paying off a credit card or adding accounts to your credit report could improve your score almost immediately.
Getting a mortgage will be challenging if your credit score is lower than 620. However, an FHA loan would let you borrow with a score as low as 500.
It’s probably best to pay off credit cards and other high-interest debt before you save more for a down payment. Whether you should prioritize lower-interest debt over a larger down payment is really a personal choice. No interest is better than low interest, but if a larger down payment can get you into a house sooner and help you build equity rather than pay rent, the larger down payment might be more beneficial.
If your mortgage loan is denied, you can apply with another lender. However, beware of lenders that call themselves bad credit mortgage companies. They often provide subprime loans to borrowers with scores too low for financing with conventional or government-backed loans. Subprime lenders often give deceptively low promotional rates on adjustable-rate loans. These loans are extremely risky because rates can soar when they adjust later.
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