A mortgage is often the largest loan a person will take out. To make sure borrowers can pay back their mortgages, lenders typically have strict qualifications. One such qualification is a credit score at or above the lender’s minimum.
If your score isn’t high enough, you might not be approved for a mortgage loan. If you're approved with a lower score, be prepared to pay a higher interest rate than you would with a higher credit score.
What is a low credit score for buying a house?
A credit score is typically a three-digit number that reflects information in your credit reports from Experian, TransUnion, and Equifax. FICO, which stands for Fair Isaac Corporation, is the most commonly used credit score company. Its scoring model ranges from 300 to 850. Here’s how FICO categorizes credit scores:
Poor: 579 or below
Fair: 580 to 669
Good: 670 to 739
Very Good: 740 to 799
Excellent: 800+
Conventional mortgage lenders typically don’t lend to borrowers with credit scores lower than 620. But, there are other types of loans backed by the federal government that have lower credit score requirements.
Credit score requirements by loan type
Here’s a breakdown of credit score minimums for loans from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the United States Department of Agriculture (USDA).
How to buy a house with a bad credit score
If you have a bad credit score, you might be able to buy a house with a loan backed by the government. These loans help people with less-than-stellar credit purchase a home.
Here's some more information about government loans through the FHA, VA, and USDA:
FHA
These loans are backed by the Federal Housing Administration, a division of the Department of Housing and Urban Development (HUD), and offered by mortgage lenders. If your credit score is at least 580, you can borrow up to 96.5% of the home’s value. If your score is 500 to 579, you can borrow up to 90% of the home’s value. You can also roll the closing costs into the loan. Even if you’ve had a bankruptcy, you could still qualify for an FHA mortgage.
FHA loans have specific requirements. The home must pass inspection by a qualified FHA home inspector, and the home needs to be appraised by an FHA-approved appraiser. You must live in the home as your primary residence and occupy it within 60 days of closing. You’ll also need to pay a mortgage insurance premium, once at closing, which costs 1.75% of your loan amount, and an annual mortgage insurance fee that typically costs 0.15% to 0.75% of the loan balance annually.
VA
These loans are backed by the Department of Veterans Affairs to help veterans, service members, and eligible surviving spouses buy a home. They are offered through mortgage lenders. VA loans offer many benefits, such as no down payment requirement and no mortgage insurance. The VA can determine whether you’re eligible for this type of loan.
USDA
These loans are backed by the U.S. Department of Agriculture to encourage rural development. They’re ideal for people who have low or moderate income and who will live in a designated rural area. You can check the USDA’s website to see whether your area of interest is eligible. While there are also no down payment requirements with a USDA loan, your debt-to-income ratio (DTI) must be no higher than 41% to qualify. You can calculate your DTI by dividing your monthly debt payments by your gross monthly income.
What to do if you can’t get a bad-credit home loan
If you can’t get a mortgage now on your own, you have some options:
- Get a cosigner: This should be a financially responsible person in your life. If you ask someone to cosign, they become responsible for making your mortgage payment every time you don’t. If the cosigner doesn’t pay, you could lose the home. It's best to choose someone you can trust who has good credit and is able to cover any payments you might miss.
- Offer a large down payment: You might qualify for a loan with bad credit if you put down a large down payment, which is usually 20% or more of the price of the home. This varies between lenders.
- Wait until your credit score improves: Although it can take seven to 10 years for a bad incident to fall off your credit report, you can take steps to improve your credit before that. After increasing your credit score, you can apply for a mortgage.
How to improve your credit score
Some people choose to wait until their credit score improves to buy a house. Here are some tips to improve yours:
- Use credit responsibly: Aim to pay your credit card balances in full each month. It's also best to avoid maxing out your credit cards. Some advisors say to use no more than about 30% of your available credit. The longer you pay your bills on time, the more your credit score should rise.
- Pay down debt: There are ways to help you pay down debt. One tactic is the debt snowball method. With this strategy, you make the minimum payments on all your larger debts and pay the maximum amount you can afford on your smallest debt. Then you repeat this method until all your debts are paid off completely.
- Check your credit report for errors: Credit reports often contain errors. You can get a free copy of your credit report each year from all three credit reporting agencies — Equifax, TransUnion, and Experian — through AnnualCreditReport.com. You can even get free weekly reports through the end of 2023. Read the reports to determine whether there are any errors that could be hurting your score. If you find an error, notify the relevant credit bureau and ask to have the error corrected.
Mortgages for bad credit FAQs
What is the lowest credit score allowed for a mortgage?
Conventional mortgage lenders typically don’t lend to borrowers with credit scores lower than 620. However, this varies by loan type.
What is the easiest loan to get with bad credit?
The best bet to get a mortgage loan if your credit score is below 620 is to apply for a government-backed loan through the FHA, VA, or USDA (if eligible). You could be approved for a mortgage with a score as low as 500.
Which mortgage lenders will work with bad credit?
Plenty of mortgage lenders work with people with bad credit. You can inquire with your bank or credit union, or you can do an internet search for lenders that accept bad credit. Note that you'll likely find it easier to qualify for a government-backed loan than a conventional loan.
What is a good down payment for a mortgage for bad credit?
If you have a bad credit score, your application will be more attractive to lenders if you can put down a large down payment of 20% or more.
What factors besides credit scores do mortgage lenders consider?
Besides credit score, lenders look at how much debt you have in relation to your income (your DTI). You can determine yours by dividing your total monthly recurring debts by your gross monthly income. For example, if your total monthly debts are $2,000 and your gross monthly income is $5,000, your DTI is 40%. If you want to lower your DTI, you can pay down your debts, increase your income, or both.
