How to get a mortgage with bad credit

While it can be hard to buy a house with bad credit, it’s still possible. However, your mortgage options will likely be more limited, and you might need to consider additional strategies to get approved.

If you’re wondering how to buy a house with bad credit, here’s what you should know.

What credit score do you need to buy a house?

The minimum credit score typically needed to purchase a home varies from 500 to 620, depending on the type of mortgage as well as the lender. Here are the general requirements to expect:

• Conventional loans: These loans, which aren’t backed by a government agency, usually require a credit score of 620 or higher.
• FHA loans: You can get approved for a loan backed by the Federal Housing Administration (FHA) with a credit score as low as 500. However, this means you’ll have to make a down payment of at least 10%. If you have a credit score of at least 580, you can make a down payment as low as 3.5%.  
• USDA loans: The U.S. Department of Agriculture (USDA) doesn’t require a minimum credit score. However, lenders that offer USDA loans generally expect a score of at least 640.
• VA loans: While the Department of Veterans Affairs (VA) doesn’t have a specific credit score requirement, most lenders that offer VA loans have their own qualifying criteria. Several accept credit scores as low as 580, though a 620 minimum is more common.

Keep in mind: Your credit score isn’t the only factor that lenders consider, and specific requirements can vary by lender. On top of agreeing to a credit check, be prepared to provide information about qualifying assets, income history, current debts and how much of a down payment you plan to make.

What credit score do mortgage lenders use?

The most commonly used credit score is the Fair Isaac Corporation (FICO) score. This credit score is available from the three major credit bureaus: Equifax, Experian and TransUnion. Note that there are five different FICO scoring models with minor differences between them, and each credit bureau uses a different one: 

• Equifax: Uses FICO Score 5.
• Experian: Uses FICO Score 2.
• TransUnion: Uses FICO Score 4.

Typically, lenders use the middle score obtained from these three agencies, which is your median credit score. However, if two of your three credit scores happen to be the same, lenders will use that number. 

Keep in mind: If you apply with a co-borrower, mortgage issuers usually use the lower median score between both credit profiles.

Can you get a mortgage with bad credit?

Yes, it’s possible to get a mortgage with poor credit, which many lenders consider to be a credit score from 500 to 620. However, if your score is in this range, anticipate having fewer mortgage options overall available and needing to pay more interest and fees. 

The initial documentation requirements when applying with bad credit are similar to those with good credit, such as providing your recent pay stubs or two most recent annual tax returns. 

A critical difference, however, is that your loan officer might offer manual underwriting, which is a more extensive underwriting process that allows for including additional information to improve your approval odds.

If you’re eligible for manual underwriting, you can add compensating factors to your application, such as having high cash reserves, stable employment or additional qualifying income that’s not included in a standard evaluation.

Tip: If you can’t qualify for a mortgage on your own, consider applying with a co-borrower. This is someone with good credit who is willing to share responsibility for the loan. Having a co-borrower might also qualify you for a better rate than you’d get on your own.

Just keep in mind that your co-borrower will be equally liable for repayment of the loan, and any missed payments will result in damage to both your and your co-borrower’s credit.

How poor credit affects your mortgage rate

Your credit score plays a major role in determining your mortgage interest rate. In general, lenders tend to charge higher rates and fees for bad credit loans. This is because borrowers with bad credit are seen as a riskier investment, which results in a higher rate to offset that risk. So in general, the lower your credit score, the higher your rate will be.

Several other factors also impact the rate you qualify for, including your down payment amount and your debt-to-income (DTI) ratio. 

How to get a mortgage with bad credit

If you’re ready to apply for a mortgage, follow these steps:

1. Check your credit

When you apply for a mortgage, the lender will review your credit to determine if you qualify — so it’s a good idea to check your credit beforehand to get an idea of where you stand. You can use a site like AnnualCreditReport.com to review your credit reports for free. Be sure to dispute any errors with the appropriate credit bureau to potentially boost your credit score.

Note that your credit report doesn’t contain your credit score. To get your score, you can use a free, online credit-monitoring service. You might also have access to it through your bank or credit card company.

2. Decide what type of loan to apply for

There are several types of mortgages available, so you’ll want to consider what kind of loan will work best for your needs. Here are the main options to look into:

• Conventional loans: These can have lower fees than government-insured programs. However, you’ll generally need a credit score of at least 620.
• FHA loans: You can have a credit score as low as 500 to qualify for an FHA loan — though remember that this means you’ll have put a minimum of 10% down. If you have a credit score of 580 or higher, the down payment requirement drops to 3.5%.
• USDA loans: These loans are geared toward low-income borrowers buying homes in eligible rural areas. Remember that while the USDA doesn’t have a minimum credit score requirement, USDA lenders usually expect a credit score of at least 640.
• VA loans: These loans are available to service members, veterans and surviving spouses. Like the USDA, the VA doesn’t specify a minimum credit score. However, lenders that offer these loans generally require scores of at least 580, though some have higher requirements than this.

Tip: Several options are also available to first-time homebuyers, including special loan programs as well as down payment assistance and closing cost assistance.

3. Compare lenders and get preapproved

It’s important to shop around and compare your options with as many mortgage lenders as possible. Online mortgage lenders can be a good place to start when looking for a mortgage with bad credit as some consider additional factors beyond credit score in the application process. 

Many lenders let you pre-qualify with only a soft credit check that won’t hurt your credit score. This will give you a rough estimate of how much you might be able to borrow from a lender and can help you set a reasonable budget. 

If you want to proceed with a lender, you can opt to get preapproved. This will provide a more accurate estimate of how much you could get approved for compared to prequalification and can give you a leg up when putting an offer on a home. Note that preapproval will require more information as well as a hard credit check.

4. Find your home

Generally, the next step is hiring a real estate agent to assist you through the homebuying process. They’ll keep you posted on local listings and accompany you to open-house appointments. When you find a home you like, they also help you submit an offer.

5. Choose a lender and complete the application

After you’ve signed a purchase agreement with the seller, you can submit a full application with the mortgage lender of your choice. Be prepared to provide requested documentation regarding identification, income and more.

Tip: You can apply with multiple lenders to compare your options. As long as all of the applications are submitted within a 45-day window, the resulting credit inquiries will only be counted as one hard credit check. 

6. Close on the loan

If you’re approved, the loan will enter the closing process. It generally takes anywhere from 30 to 60 days to close, depending on the lender and the complexity of the loan. On closing day, you’ll sign paperwork and pay closing costs, which are typically 3% to 6% of the loan amount. Afterward, you’ll get the key to your new home.

Tip: You can expect a similar application process if you want to refinance your mortgage. However, you might be able to speed things up with a streamline refinance on eligible government-backed loans.

For example, you could qualify for an FHA streamline refinance after making six on-time payments on an existing FHA-insured mortgage. Note that lender credit requirements might still apply. 

Tips for improving your credit score before buying a house

If you can wait to purchase a home, it can be worth taking the time to improve your credit score. This can help you get approved for a mortgage more easily and qualify you for better rates in the future.

Here are some strategies that can help you build your credit:

• Make on-time payments. Your payment history is the biggest factor in your credit score, comprising 35% of your score. Paying all of your bills on time each month can help improve your score over time. This will also give lenders more confidence that you can manage a new monthly payment when you’re ready to apply for a mortgage. 
• Pay down debt. The second-biggest part of your credit score is your credit utilization (30%). This is how much you owe on revolving credit lines — including credit cards and lines of credit — compared to your total credit limits. Making extra payments on these credit lines or paying off existing balances can help to reduce your credit utilization and boost your credit as a result.
• Fix credit report errors. Sometimes, payment or account details don’t appear correctly on your credit reports. If this happens, file a dispute with the appropriate credit bureau. In some cases, this can help to improve your credit score. 
• Avoid applying for new credit. Consider not applying for new credit cards or loans if you plan to purchase a home in the next few months. A new account opening can cause a slight drop in your credit score, which you’ll want to avoid if you’re applying for a mortgage. In addition, mortgage lenders might insist on seeing you develop a positive payment history on the newly opened account before they’ll approve an application.
• Keep old accounts open. Length of credit history makes up 15% of your FICO profile and closing old accounts can decrease the average age of your accounts, which will decrease your credit score. Instead, keep existing credit cards and other accounts open — even if you don’t use them — to strengthen your credit history.