Where to find home loans for bad credit

Buying a home can be stressful. If you have bad credit, you may be worried about whether or not you can even qualify for a home loan. Many mortgage lenders do have strict requirements — but homeownership is possible, even if your credit isn’t in the best shape.

If you’re looking for home loans for bad credit, you have options. Learn more about where to find these home loans, as well as some tips on how you can improve your credit before buying a home.

You can get a home loan with bad credit

Fortunately, it’s possible to get approved for a home loan with bad credit. But if you do, you probably won’t receive the best rate. Typically the higher your credit score, the better rate you’ll receive.

Lenders tend to view people with poor credit as riskier borrowers, so they charge a higher interest rate as a way to protect themselves against the risk of you defaulting on your home loan.

What do mortgage lenders consider a bad credit score?

There’s no minimum credit score required to buy a house, as each lender has its own requirements. But most lenders look at your three-digit FICO score to determine how likely you are to repay a loan, and what type of interest rate to offer you.

If your FICO score is below 580, your credit score is considered "poor" or "bad." A FICO score between 580 and 669 is considered "fair," meaning it’s below the average credit score of most U.S. consumers. FICO scores ranging from 670 to 799 are considered "good" and "very good," and FICO scores of 800 and above are considered "exceptional." The higher your FICO credit score, the better mortgage rate you can expect to receive.

Other factors that mortgage lenders consider

Lenders consider other factors beyond your credit score when you apply for a mortgage.

• Down payment amount — A down payment is the part of your home’s purchase price that you pay upfront. The more money you put down, the less you’ll have to borrow, so you may get a lower interest rate and lower mortgage payments.
• Debt-to-income ratio — Your DTI ratio is your monthly debt payments divided by your gross monthly income. While requirements depend on the mortgage you apply for, a DTI of less than 50% is ideal.
• Assets and income — Lenders look at your income and assets to figure out whether you can afford a mortgage. If you can’t show that you have the resources to cover your monthly payments, you may not get approved.
• Length of work history — You’ll likely need at least two years’ worth of work history. This can be a challenge if you recently started a business or changed jobs before or while you applied for a home loan.
• Cosigners — If you have bad credit, you may need a cosigner to get approved for a home loan. A cosigner will be responsible for paying your mortgage if you default.

How to get a home loan with bad credit

If you want to get a home loan with bad credit, follow these tips to help you find one that’s right for your situation.

• Shop around for lenders who work with people with bad credit. Not all lenders are created equal. Do your research and find those that lend to borrowers with bad credit.
• Look for first-time homebuyer programs. First-time homebuyer programs can make homeownership more accessible and affordable. Check out your state’s housing agency website to learn about the programs available to you.
• See if you qualify for down payment assistance programs. Depending on your situation, you may be eligible for down payment assistance. Many first-time homebuyer programs offer it.
• Add a cosigner. If you have a trustworthy friend or family member with good credit, ask them to cosign your home loan. Just make sure you’re able to make your monthly payments or the responsibility will fall on them.
• Save for a larger down payment. Since a larger down payment means you’re a less risky borrower, wait to apply for a mortgage until you’ve saved a substantial amount. A larger down payment also leads to a lower interest rate and lower monthly payments.
• Ask your family for help. Let your loved ones know that you’re in the market for a home and could use some financial assistance. They may help you with your down payment, closing costs or other related expenses.

Types of home loans for bad credit

If you have bad credit, there are a number of home loan options to explore.

Conventional loan

A conventional loan isn’t insured or guaranteed by a government entity. You can take one out through a private lender like a bank, credit union or mortgage company. While conventional loans are more difficult to qualify for than government loans, they’re also usually more flexible.

• Minimum credit score: 620
• Minimum down payment: 3%
• May be good for: Borrowers with good credit and minimal debt

Fannie Mae HomeReady

HomeReady is a conventional mortgage loan offered by Fannie Mae. If you apply for one, you can use income from your parents, grandparents, relatives and others to help you get approved. Upon approval, you may get rid of your private mortgage insurance, or PMI, after you pay down 20% of your home’s value.

• Minimum credit score: 620
• Minimum down payment: 3%
• May be good for: Borrowers with lower-than-average incomes

FHA loan

FHA loans are insured by the Federal Housing Administration. While these loans have low down payment and credit score requirements, you’ll be required to pay mortgage insurance to protect the lender in the event you default.

• Minimum credit score: 500
• Minimum down payment: 3.5% if your credit score is 580 or higher; 10% if your score falls in the 500-579 range
• May be good for: Borrowers with lower credit scores and down payment amounts

Freddie Mac Home Possible

The Freddie Mac Home Possible mortgage has a low down payment of 3%. But in order to qualify, you can’t earn more than 100% of the annual median income in your area.

• Minimum credit score: 660
• Minimum down payment: 3%
• May be good for: Borrowers with lower incomes and down payment amounts

Non-qualified (non-QM) mortgage

A non-qualified (non-QM) mortgage is for homebuyers who are unable to meet the strict criteria of a qualified mortgage, which meets federal guidelines. It can allow you to get approved for a home loan if you’re self-employed, work a nontraditional job or lack the documentation that most mortgages require.

• Minimum credit score: Varies by lender
• Minimum down payment: Varies by lender
• May be good for: Borrowers who are self-employed or earn alternative sources of income

USDA loan

Backed by the United States Department of Agriculture, a USDA loan is a low-interest, zero-down-payment mortgage that can help you finance a home in an eligible rural area.

• Minimum credit score: 640
• Minimum down payment: 0%
• May be good for: Borrowers with low to moderate incomes who want to buy a home in a rural area

VA loan

A VA loan is guaranteed by the United States Department of Veterans Affairs. As long as you’re an active service member, veteran or eligible spouse, you may get approved for a VA loan with 0% down and no PMI. But keep in mind that you’ll likely have to pay a funding fee of up to 3.6% of your loan amount.

• Minimum credit score: Varies by lender
• Minimum down payment: 0%
• May be good for: Borrowers who are active service members, veterans or eligible spouses

Should you get a home loan with bad credit?

Whether or not you should get a home loan with bad credit depends on your unique situation. Here are some pros and cons to consider.

Pros of home loans for bad credit

• Various mortgage options — Even if you have bad credit, you have a number of home loans at your disposal. You can look into both conventional and government-backed mortgages.
• Can get approved with a higher down payment — If you’ve saved a good amount of cash for a down payment, you may secure a home loan with a lower interest rate. A higher down payment can make up for a low credit score.
• May allow you to build equity — If you’re currently renting, a home loan for bad credit can allow you to pursue homeownership. You can build equity and potentially earn some money in the future, instead of paying for a property that will never be yours.

Cons of home loans for bad credit

• High interest rates — If you take out a home loan for bad credit, you may be stuck with a high interest rate, which can cost you thousands of extra dollars on your home.
• Down payment may be required — You might have to save money for a down payment. While down payment requirements vary, they’re often anywhere between 3% and 20% of the overall cost of the home.
• May not qualify for first-time homebuyer programs — Many first-time homebuyer programs, which make homeownership easier and more affordable, require minimum credit scores. If you have bad credit, you may not be eligible.

How to improve your credit before buying a home

Before you buy a home, use these strategies to help improve your credit.

• Lower your DTI. To reduce your DTI, increase the amount you pay on your debt and postpone large purchases so you’re using less credit. Aim for a DTI of no more than 36%.
• Pay down debt. Do your best to tackle as much debt as possible. Consider picking up a part-time job or starting a side hustle to help you meet your financial goals.
• Make on-time payments. It’s important to pay your bills on time — even one late payment can hurt your credit. Set up calendar reminders or enroll in automatic payments so you don’t forget.
• Check credit reports for accuracy and dispute any inaccurate information. Get a copy of your credit reports for free from the main credit bureaus — Equifax, Experian and TransUnion — at AnnualCreditReport.com. Dispute any errors, such as accounts with the incorrect balance, closed accounts reported as open and incorrect accounts due to identity theft.
• Become an authorized user. Ask a family member with good credit if you can become an authorized user on their credit card. It will allow a new, positive account to appear on your credit.