With years of experience and a passion for helping clients achieve their financial goals, our team is committed to guiding you on your journey to credit recovery and financial success.
Reviewed By:
Ashley Davison
Ashley Davison
Editor
Ashley is currently the Chief Compliance Officer for Credit Saint, previously the Chief Operating Officer. Ashley got into the Financial world by working as a Logistics Coordinator at Ernst & Young. Coming from a previous career in education, she is eager to teach the world every...
Bad credit doesn’t have to be a dead end. Government-backed FHA, VA and USDA loans have more flexible credit rules, and an FHA loan may be possible with a score as low as 500 and 10% down.
For many people, buying a home is a significant milestone, the American dream in action. However, a low credit score can feel like a major roadblock on the path to homeownership.
While it’s true that a higher credit score makes it easier to get approved for a mortgage with favorable terms, it’s not impossible to qualify for a home loan with less-than-perfect credit. The key is understanding your options and knowing what lenders are looking for.
This guide will walk you through the steps to qualify for a mortgage with bad credit, from exploring government-backed loans to taking proactive steps to improve your credit profile.
Key Takeaways
Government-backed loans like FHA, VA, and USDA offer more flexible credit requirements than conventional loans.
A larger down payment can help offset a lower credit score and reduce the lender’s risk.
Improving your debt-to-income (DTI) ratio is crucial for mortgage qualification.
Check all three of your credit reports before you apply, and dispute anything that’s inaccurate, incomplete or unverifiable.
Credit Score Requirements for Conventional Loans
The biggest hurdle for borrowers with bad credit is the credit score needed for a conventional loan. These loans aren’t insured or guaranteed by the federal government, so lenders take on more risk.
Many lenders look for a score of 620 or higher. If your score is lower, a government-backed loan may be a better fit.
Understanding Government-Backed Mortgage Options
Several government-backed loan programs are built for borrowers who may not qualify for a conventional mortgage. The federal government insures or guarantees these loans, which lowers the lender’s risk and allows more flexible credit rules.
FHA Loans
FHA loans are insured by the Federal Housing Administration and are a popular choice for first-time buyers and people with lower scores. With a credit score of 580 or higher, you may qualify with a down payment as low as 3.5%.
With a score between 500 and 579, you may still qualify, but you’ll need to put down at least 10%. Many lenders also set their own higher minimums.
One thing to keep in mind with FHA loans is that you’ll be required to pay a mortgage insurance premium (MIP). This includes an upfront premium paid at closing and an annual premium paid in monthly installments for the life of the loan (or 11 years if you make a down payment of 10% or more).
If you’re a veteran, an active-duty service member, or an eligible surviving spouse, a VA loan could be an excellent option. VA loans are guaranteed by the U.S. Department of Veterans Affairs. The VA doesn’t set a minimum credit score, although lenders set their own minimums (often around 620).
The biggest advantages of VA loans are that they typically require no down payment and do not have a mortgage insurance requirement.
Most borrowers pay a one-time VA funding fee, which depends on your down payment and whether you’ve used the benefit before. Some borrowers, such as veterans who receive VA disability compensation, don’t have to pay it.
USDA Loans
The U.S. Department of Agriculture offers USDA loans to encourage homeownership in eligible rural and suburban areas. These loans are designed for low- to moderate-income borrowers and, like VA loans, often have no down payment requirement.
While the USDA doesn’t set a minimum credit score, most lenders who offer USDA loans look for a score of at least 640.
If your score is lower, you may still be able to qualify by providing additional documentation that demonstrates your ability to repay the loan, such as a consistent history of paying rent on time.
Steps to Take Before Applying for a Mortgage
Regardless of which loan type you pursue, taking these steps can increase your chances of getting approved:
1. Check Your Credit Report: Obtain copies of your credit reports from all three major bureaus: Equifax, Experian, and TransUnion. Review them carefully for any errors or inaccuracies. If an error is corrected, your score is calculated using accurate information.
2. Improve Your Debt-to-Income (DTI) Ratio: Your DTI ratio is the percentage of your gross monthly income that goes toward paying your monthly debt payments. Many lenders look for a DTI of 43% or lower, though some loan programs allow more. You can improve your DTI by paying down existing debt or increasing your income.
3. Save for a Down Payment: While some loans don’t require one, a larger down payment can make you a more attractive borrower. It shows lenders you’re financially responsible and reduces their risk.
4. Avoid New Credit: In the months leading up to your mortgage application, avoid opening new credit cards or taking out other loans. Each new application can result in a hard inquiry, which can temporarily lower your credit score.
It’s challenging but not impossible. An FHA loan is your most likely option, but you’ll need a down payment of at least 10%. You’ll also need to meet other lender requirements, such as a stable income and a low DTI ratio.
It depends on your credit history. If you dispute an error, the credit bureau generally has 30 days to investigate, up to 45 in some cases. Building a stronger payment history or paying down debt usually takes longer, and no one can promise how much your score will change.
No. While many first-time homebuyer programs are designed for people with lower credit scores, government-backed loans like FHA, VA, and USDA are available to repeat buyers as well, as long as you meet the eligibility criteria.
A co-signer with a strong credit history can help you qualify for a mortgage. The lender will consider both of your credit scores, incomes, and debts. However, remember that your co-signer is legally responsible for the loan if you fail to make payments, which is a significant commitment.
Bottom Line on Getting a Mortgage With Bad Credit
Bad credit makes getting a mortgage harder, but not impossible. FHA, VA and USDA loans have more flexible credit rules than conventional loans, so start by learning which ones you may qualify for.
Before you apply, check all three credit reports for errors, work on lowering your debt-to-income ratio and save what you can for a down payment.
Reviewed By:
Ashley Davison
Editor
Ashley is currently the Chief Compliance Officer for Credit Saint, previously the Chief Operating Officer. Ashley got into the Financial world by working as a Logistics Coordinator at Ernst & Young. Coming from a previous career in education, she is eager to teach the world everything she knows and learn everything that she doesn’t! Ashley is a FICO® certified professional, a Board Certified Credit Consultant, a Certified Credit Score Consultant with the Credit Consultants Association of America, UDAAP certified, and holds a Fair Credit Reporting Act (FCRA) Compliance Certificate.
