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. Many mortgage lenders will offer lower rates to homebuyers with higher credit scores. With certain loan types, your score 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 loan options you can qualify for with a lower score.

What is considered a low credit 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:

Credit score requirements by loan type

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 Administration (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:

How to get a mortgage with bad credit

Some mortgage lenders will approve you with a bad credit score, but you might have a higher interest rate. Homebuyers 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 for an FHA loan with a credit score as low as 500 and a down payment of 10%.

VA loans are often the best choice for eligible veterans and active-duty service members, even if they have good credit. The Department of Veterans Affairs guarantees the loans and doesn’t set a credit score requirement. Private mortgage lenders that originate the loan have their own credit requirements, typically around 620, but you could still find lenders who will approve you with a lower credit score. 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 U.S. Department of Agriculture. You can use the USDA’s property eligibility map to check if a property is in a rural area. 

What to do if you can’t get a bad credit home loan

If you’re buying a house with bad credit, mortgage lenders will take a close look at your finances to make sure you can handle a mortgage payment. 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 if you're unable to make the monthly 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.

Pay down debt: Lenders will look at your debt-to-income ratio (DTI) when they assess your ability to make a monthly mortgage payment. DTI describes what percentage of your gross monthly income goes toward debts, including credit cards, car loans, and a prospective mortgage payment. Fannie Mae considers a total DTI below 36% to be good. 

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.

*https://advocacy.consumerreports.org/press_release/credit-report-error-complaints-to-cfpb-have-increased-more-than-2-5-times-since-2021/

How to improve your credit score

Putting a home purchase on hold gives you time to get your finances in order, especially if you need to improve a poor credit score. Following these steps can result in small changes almost right away and big improvements over time:

1. Check your credit report: Get a copy of your credit report and check it for errors and old accounts you might have forgotten about. You can get a free credit report from all three credit bureaus from AnnualCreditReport.com.
2. Pay bills on time: No credit factor has a bigger impact on your score than your payment history. To avoid missing payments, set up auto payments for loans, credit cards, and other accounts that get reported to credit bureaus.
3. Pay down debt: Credit utilization, which is the amount of debt you have in proportion to your credit limits, is the next-largest factor affecting your credit score. Reducing your balances to no more than 30% of your limits is one of the fastest ways to improve your credit score.
4. Avoid applying for unnecessary credit: Hard inquiries on your credit report reduce your score slightly. In addition, new credit reduces the average age of your accounts, which can also work against you.
5. Become an authorized user on someone else’s account: If you have a friend or family member with good credit, having them add you to their account could improve your score based on their good payment history.
6. Look for ways to strengthen your credit: Use a service such as Experian Boost to add accounts to your credit report that wouldn’t normally be reported. The service uses your linked bank account to verify on-time payments for streaming and wireless subscriptions, utility bills, and other accounts you add. The extra accounts can strengthen your payment history and boost your credit score.

Bad credit mortgage FAQ

How long will it take to improve my credit score?

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.

How hard is it to get a mortgage with bad credit?

Getting a mortgage will be challenging if your credit score is lower than 620. However, some loan programs allow borrowers to have lower credit scores. For example, an FHA loan would let you borrow with a score as low as 500. 

Is it better to pay down debts or put more money toward a down payment?

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.

What happens if my mortgage loan is denied?

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 loan options are extremely risky because rates can soar when they adjust later.