Best Mortgage Lenders for Poor Credit for June 2020

Many lenders have strict qualifying requirements for mortgage loans, which can make it challenging for borrowers with bad credit to obtain a mortgage. However, if you're a would-be homebuyer looking for mortgage loans for bad credit, there are options out there.
A lot of the best mortgages for bad credit are loans backed by government agencies including the Federal Housing Administration (FHA), the Veteran's Administration (VA), or the U.S. Department of Agriculture (USDA).

While some lenders make conventional loans to homebuyers with bad credit, you will often secure more affordable financing if you get a poor credit mortgage insured by a government agency. These mortgages not only have relaxed credit requirements but also require lower down payments than most conventional mortgages.

There are three primary options for government-backed loans that could be available to borrowers looking for bad credit mortgage loans.

FHA Loans

FHA Loans are issued by private lenders but backed by the Federal Housing Administration. You can qualify for one with a credit score of 580 and a down payment of 3.5% or with a score as low as 500 and a 10% down payment. There are no minimum income requirements, although lenders must determine if the would-be homeowner has sufficient income to repay the loan.

VA Loans

VA Loans are also issued by private lenders, but this time the Veterans Administration guarantees the loan rather than the FHA. There is no minimum credit score requirement imposed by the VA. There's also no down payment required unless the home appraises for less than you're paying for it. You do need to be a service member or have a record of military service, although surviving spouses of servicemen and women are also eligible.

USDA Loans

The USDA offers two programs for would-be homebuyers. Section 502 Direct Loans are made by the USDA directly and are open only to borrowers with limited incomes who are buying properties in rural areas. The USDA also guarantees loans to borrowers with low incomes, although the income limits are higher for these loans made by private lenders. No down payment is required for USDA loans, interest rates are often below what you'd be charged on a conventional loan, and you can qualify even with imperfect credit.

While you can get a mortgage with poor credit, your mortgage will be less expensive and you'll have a broader choice of lenders if you raise your score. There are seven simple steps you can take to help you rebuild credit.

1. Pay all your bills on time: Payment history is the most important component of your score. Almost any creditor, including landlords and storage unit owners, can report you if you're late on payments.
2. Make sure your positive payment records are included in your credit history: If you've paid your rent, utilities, or other bills on time, try to get them included. Services such as Experian Boost can help you get some of these accounts reported for free that otherwise wouldn't be.
3. Keep your credit utilization ratio low: Maxed out cards can be very damaging to your credit score. Try to keep your credit utilization ratio below 30% of your credit line to avoid hurting your score.
4. Avoid closing old credit card accounts: The length of your credit history is an important factor in determining your credit score. The older your accounts, the higher your score.
5. Aim to have a mix of different kinds of credit: Lenders like to see you've used different kinds of debt including credit cards and other revolving debt as well as car loans and other installment loans.
6. Try to get old black marks removed from your credit history: Sometimes creditors are willing to remove a late payment from your credit report if you've mostly been a good customer. You can write a goodwill letter or call your creditor to ask.
7. Be smart about rate shopping: While it's a smart idea to shop for a mortgage or other loan, you want to avoid getting too many hard inquiries on your credit report. Look for lenders that pre-approve you and provide details of loan terms with a soft credit check only.