How to get a mortgage with bad credit

When a homebuyer submits a mortgage application to a lender, the lender’s underwriter reviews the buyer’s financial information to determine two things: whether the buyer can afford to repay the loan and whether the buyer is likely to repay the loan. Credit score is an important indicator for the latter — underwriters use it to gauge how well the buyer has managed credit in the past to get a sense of how well they’re likely to manage it in the future. A low credit score correlates with a higher risk of defaulting on the loan.

What credit score do you need to buy a house?

The minimum credit score needed 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:

300 to 579: Poor

580 to 669: Fair

670 to 739: Good

740-799: Very good

800 and up: Exceptional

Another scoring model, VantageScore, categorizes scores in a similar way:

300 to 499: Very poor

500 to 600: Poor

601 to 660: Fair

661 to 780: Good

781 to 850: Exceptional

According to the most recent National Survey of Mortgage Originations, from December 2022, 71.3% of respondents who took out a new mortgage loan had a VantageScore of 740 to 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 table that follows lists each loan type and the minimum credit score you need to qualify.

How to get a mortgage with bad credit

You’ll 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 who decide against one for some other reason. You can qualify with a credit score as low as 500.

VA loans are often the best choice for eligible veterans and active-duty service members, even if they have good credit. But the absence of VA-mandated credit minimums means you might find a lender willing to originate your loan even if your credit score is less than 620. 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. That area must qualify as “rural” by the USDA’s definition.

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

Every conventional and government-backed loan requires the lender to verify that borrowers are willing and able to repay. If you’re not quite there yet, 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 in the event you’re unable to make the 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.

Wait until you qualify: As hard as it is to wait, the best option usually is 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.

How to improve your credit score

Putting a home purchase on hold gives you time to get your financial house in order, starting with your 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 combined 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 accounts reduce 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, 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 loans are extremely risky because rates can soar when they adjust later.