How to get a mortgage
Want to buy a house? Here’s everything you need to know about how to get a mortgage, from the preapproval process to the closing details. Learn more.
Kathryn Parkman
Purchasing a home is a huge milestone, yet the road might seem impossible if you're dealing with bad credit. The good news is that while a low credit score can present obstacles, it doesn't mean homeownership is out of reach.
Learn which homebuying options are available to you if you have bad credit and how to prove to lenders you aren’t a risk.
Mortgage lenders can differ in what they consider a “bad” credit score, and some may have more rigorous lending standards than others. A bad credit score typically falls below 580, according to FICO.
That said, conventional, conforming loans — those not part of a government lending program but that meet requirements for backing by Fannie Mae and Freddie Mac — generally have a minimum credit score requirement of 620, according to Fannie Mae.
Government-backed loans, such as Federal Housing Administration (FHA) loans, usually have more flexible credit score requirements. However, they may have other restrictions, such as borrowing limits.
» COMPARE: Best bad credit home loans
Buying a house with bad credit is possible, but your requirements and journey will look different than someone who has excellent credit. Not only will you need to find a lender that accepts borrowers with poor credit, but you will need to prove you are a safe risk for lenders to finance. Here are a few ways you can better qualify for a home loan:
While it’s possible to qualify for a conventional mortgage with a low credit score, government-backed mortgages may be a better option.
» MORE: How much house can I afford?
Even though there are several options for individuals with poor credit to purchase a home, the pros and cons should be considered before moving forward.
A government-backed loan can be a great option if you have a low credit score. Private lenders make these loans, but the government guarantees them. That reduces the lender’s risk, allowing them to relax lending standards.
Here are some government-backed loan options if you have poor credit.
Additionally, you must meet the following requirements:
If you believe you qualify, you should contact the VA to receive a Certificate of Eligibility. Some lenders may be able to get the certificate on your behalf.
VA loans come with multiple benefits:
These loans only come as 30-year fixed-rate loans, and the property must be located in an eligible rural area. The USDA provides a search tool you can use to see if the area you are looking at qualifies. A down payment is not required on a USDA loan.
Other application requirements include:
If you can’t find a lender that will finance your homebuying dreams, there are two alternative paths you can take that can help.
It can be frustrating to delay homebuying to work on your credit, but this step will ultimately lead to better loan terms. You can work with a credit counselor or do this on your own:
A rent-to-own agreement can be a viable option for those with bad credit. This arrangement allows you to rent a property with the option to buy it at a later date. A portion of your monthly rent goes toward building equity in the home, which can be used as a down payment when you're ready to purchase.
While this offers more flexibility and time to work on improving your credit, be cautious and thoroughly review the terms of the agreement before committing.
Your best options might be two types of government loans: a VA loan or a USDA loan. Neither type of loan has a minimum credit score requirement, and both types allow you to qualify for a home loan with no down payment. Each private lender making these government-backed loans may have slightly different requirements, so you’ll need to shop around to find the one that works for you.
As with purchase mortgages, you’ll generally need a score of at least 620 to refinance your mortgage through a conventional refinancing loan.
FHA rate-and-term and cash-out loans require your score to be at least 500 if the loan-to-value ratio is below 90% and 580 if it’s above; FHA streamline refinances don’t have a minimum requirement.
The USDA and VA don’t set a minimum credit score requirement for their refinancing options.
Yes, you can. You may be able to get an FHA loan with a credit score of 500 if you are able to put down 10%. VA loans and USDA loans have no specific credit score requirements, so you may also be eligible for one of these loans with a 500 credit score.
Buying a home with bad credit is possible, whether you get a conventional loan or a government-backed loan through the FHA, USDA or VA. You may have to spend more time shopping for lenders, and you could end up with a high interest rate if you don’t have other factors to offset the low score, like a strong DTI ratio or a large down payment.
In this case, you might want to put off a mortgage temporarily and work on your credit score more. Address any short-term credit issues first, then establish a long-term plan of timely debt payments. With some hard work, you’ll be able to improve your credit and get into a home you love.
Want to buy a house? Here’s everything you need to know about how to get a mortgage, from the preapproval process to the closing details. Learn more.
Kathryn Parkman
Looking to buy a house this year? ConsumerAffairs has 12 steps to help you land your dream home in 2021. See our guide for more information.
Sara Coleman
Before you buy a condo, you’ll want to check the amenities, fees, rules and more. Learn what other tips to keep in mind as you shop for a condo.
Sara Coleman
No-down-payment mortgages can be an appealing path to homeownership. Read the pros and cons, how to qualify and if they’re worth it.
Emily Moore
Steps to choose a lender, according to a loan officer: Consider mortgage options, get pre-qualified, compare offers and ask the right questions.
Ashley Eneriz
Interested in buying a FSBO house? From preapproval to closing, we’ve got tips on how to buy a home for sale by owner in five simple steps.
Brandi Marcene
We’ll start sending you the news you need delivered straight to you. We value your privacy. Unsubscribe easily.