How to Get a Mortgage With Bad Credit

Maurie Backman is a personal finance writer who covers everything from savings to retirement to healthcare. Her articles have appeared broadly on major outlets such as CNBC, MSN, and Yahoo.

A low credit score doesn't have to stop you from buying a home. Here's how to get a mortgage with bad credit.

Couple Applying Online

The higher your credit score, the more likely you are to get approved for a home loan -- but that doesn't mean qualifying with a lower score is impossible. Here, we'll show you how to get a mortgage with bad credit.

What credit score is too low to get a mortgage?

Before we talk about how to get a mortgage with poor credit, let's review what that actually means. Credit scores range from a low of 300 to a perfect score of 850. Within that range, here's how FICO (the most popular scoring model) classifies different scores:

Credit Score Range Classification of Score
800 or above Exceptional
740 to 799 Very good
670 to 739 Good
580 to 669 Fair
Under 580 Poor

Data source: myFICO.

Can I get approved for a mortgage loan with a bad credit score?

Generally speaking, you need a credit score of 620 or higher to qualify for a conventional mortgage, which is a mortgage not backed by a government agency. If your score is lower, your options may be limited -- but they still exist. Keep in mind that 620 is smack in the middle of the "fair" range above, so you may be thinking: "Why wouldn't I manage to snag a conventional mortgage with a credit score of 600, or 590?"

The reason is that a home loan is a major undertaking and usually not a small amount of money. As such, lenders may be more careful about extending credit to you in mortgage form.

What types of home loans are available for those with bad credit?

There are different ways to get a mortgage if your credit is poor, including some for borrowers with credit scores of below 620. Look at our list of the best mortgage lenders for bad credit and check out the following options:

  1. FHA loans. The Federal Housing Administration tries to help would-be homebuyers secure mortgages even if their credit isn't great. You can qualify for an FHA loan with a credit score as low as 580, at which point you'll be required to put 3.5% down on your home's purchase price. If your credit score is between 500 and 579, it's still possible to qualify, but you'll need a 10% down payment or higher.
  2. VA loans. VA loans are guaranteed by the Department of Veterans Affairs, and as the name implies, they're available to active-duty military members and veterans alike. You'll usually need a credit score of 620 or higher to qualify, but some VA lenders will approve home loans for a credit score as low as 580. With a VA loan, you may be eligible for a 0% down payment.
  3. USDA loans. USDA loans are backed by the U.S. Department of Agriculture and are designed to help lower-income borrowers purchase homes in rural areas. Most lenders under this program require a credit score of 640 or above to qualify, but it's possible to get a USDA loan with a lower score as well. Like a VA loan, with a USDA loan, you may be eligible for a 0% down payment.
  4. Fannie Mae HomeReady loans. These conventional mortgages are specifically designed for lower-income borrowers. You'll need a credit score of 620 or above to qualify, at which point you may be eligible for as little as 3% down on your home.
  5. Freddie Mac Home Possible® loans. The Home Possible program is designed to make conventional loans accessible to first-time homebuyers with moderate incomes. With this program, you may qualify for as little as 3% down on your home, and what makes it unique is that you may be eligible for a loan even if you have no credit score at all.

How to find a mortgage with poor credit

If you're going into your mortgage search with bad credit, it pays to look into the programs above. But it also pays to shop around for different rates and options to see what's best for you. Community banks are a good place to start as they may offer different levels of flexibility than national banks. But also, look at online banks and credit unions -- the more options you explore, the greater your chances of finding a match.

If you think getting a mortgage will be a challenge for you, it could pay to enlist the help of a mortgage broker whose job is to match you with lenders based on your needs and financial circumstances. Additionally, if you're able to find someone with strong credit to cosign your mortgage, you'll have a better shot at getting approved.

Should you take out a mortgage with poor credit?

Having poor credit could make your home loan more expensive. The best available rates are generally reserved for borrowers with the highest scores, so if your credit needs work and you move forward with your mortgage application anyway, you could get stuck with a higher interest rate than necessary for the length of your loan.

Case in point: If you have a credit score of 760 or above, as of this writing, you might qualify for an APR of 3.017% on a $200,000, 30-year fixed loan, resulting in a monthly payment of $845. With a credit score of 620, that rate climbs to 4.606% for the same mortgage, and the ensuing monthly payment rises to $1,026.

But rates aside, if your credit is poor, you may want to think about why that is before getting a mortgage. Is it simply a matter of not having a very lengthy credit history? Or is it because you're not in a very strong place financially, and as such, have frequently been late with bills or run up a high tab on your credit cards? If it's the latter, then delaying your mortgage application and working to improve not just your score, but your entire financial picture, could be prudent.

Increase your chances of approval

One of the best ways to increase your chances of getting approved for a mortgage is to find out how to rebuild your credit. You can do so by:

  • Paying all of your incoming bills on time
  • Paying down a chunk of revolving credit (namely, your credit card balances) to lower your credit utilization ratio
  • Checking your credit report for errors that work against you, like debts associated with you that you never actually racked up (you're entitled to a free copy of your credit report each year from all three credit bureaus -- Experian, Equifax, and TransUnion)

But remember, it's not just your credit score that's evaluated when you apply for a mortgage. You'll also want to work on:

  • Lowering your debt-to-income ratio, which is the measure of outstanding monthly debts you're liable for relative to the income you earn
  • Boosting your savings for a higher down payment
  • Increasing your income -- the higher it is, the more comfortable a lender is likely to be with the idea of loaning you money
  • Securing a steady paycheck if yours is more variable

Poor credit doesn't have to prevent you from buying a home, and there are plenty of loan options out there for borrowers whose scores need improving. But before you rush to take out a mortgage, it could pay to invest a little time and get your credit score to a healthier place. Doing so could open even more borrowing options -- and more affordable ones at that.

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