A good to excellent credit score can help you lock in a lower mortgage rate. But if you’re one of roughly 28% of Americans who don’t meet this threshold, it’s understandable to wonder if you can get a mortgage with bad credit.
Your options are a bit more limited, and there are potential downsides to be aware of. But in short, the answer is yes: You can get a mortgage and buy a house with bad (or even terrible) credit.
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Mortgage lenders may not use terms like “bad” or “terrible” credit, but they do follow the language of the two major credit score models: FICO and VantageScore.
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What FICO says: A credit score ranging from 580 to 669 is fair, which is below the U.S. average. Anything below 580 is considered poor.
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What VantageScore says: Near-prime credit scores, more susceptible to higher interest rates than prime or superprime scores, range from 601 to 660. A score between 300 and 600 is subprime and could result in a denied loan application.
Read more: What credit score do I need to buy a house?
It’s possible to get a mortgage with a lower credit score. However, finding a loan program — especially with competitive interest rates — may require a bit more effort.
“If you plan on buying a house as a primary residence, lenders have specialized programs to help you build credit while applying for the loan,” said Yuval Golan, founder and CEO of the real estate financing platform Waltz, via email. “Depending on where you live, there are also state-sponsored programs with incentives for first-time home buyers that can reduce barriers for those with bad credit.”
In general, mortgage lenders consider more than just your credit score when determining whether to approve you and at what rates. Having a sizeable down payment, a stable income, and low outstanding debt can strengthen your mortgage application, even if you have a low credit score.
Poor credit doesn’t have to stop you from owning a home. These steps can help increase your chances of approval.
Review your credit report for errors, especially before applying for a mortgage. You may find open accounts that should be closed or ones with incorrect balances. Also, verify that everything listed on your report — credit cards, car loans, student loans — actually belongs to you.
Dispute any errors by reaching out to the corresponding credit reporting bureau, TransUnion, Equifax, or Experian.
A larger down payment can signal to lenders that you are a lower-risk borrower. It also means you’ll have a smaller monthly mortgage payment and pay less in interest over the life of your loan.
You don’t need a 20% down payment, but putting down 20% or more usually spares you from paying private mortgage insurance (PMI) on conventional loans.
Your debt-to-income (DTI) ratio shows how much of your gross monthly income is tied up in debt payments. Aim for a DTI ratio of 36% or lower, which is considered healthy debt management by many mortgage lenders and can increase their confidence in your ability to make on-time payments.
Improve your DTI ratio by paying down debt or increasing your income with a part-time job or side hustle.
If your credit score won’t qualify you for a mortgage, adding a trusted co-signer or co-borrower might. A co-signer is responsible for the mortgage if you, the primary borrower, can’t make payments.
Co-borrowers are a little more involved, having joint ownership of the loan and often the home as well. If you apply with either type of co-applicant, make sure you can keep up with payments so you don’t put them in a financial bind.
Some online mortgage lenders and credit unions have more flexible borrower requirements than traditional banks. This means you may be able to qualify, even with a lower credit score.
If you don’t have a credit score at all, some mortgage lenders will let you apply with proof of making on-time payments, such as utility bills, instead.
Learn more: The best mortgage lenders for bad credit
Understand the total cost
Lenders tend to view a lower credit score as a higher risk, and they have several ways to offset this risk. Beyond a higher interest rate, they may require a larger down payment or mortgage insurance. The total costs of the loan can add up if you’re not paying attention.
“Look at the total loan package,” advised Golan. “Ask about their loan origination and other fees charged as part of this process. Some lenders use lower interest rates to draw in buyers who don’t dig deeper and ask this question. So while their interest rate may be slightly higher, the up-front cost could be far higher.”
There is good news: Mortgage lenders have specific types of home loans that help buyers with lower credit scores buy a home. The options below tend to have looser requirements, helping you qualify without a strong score.
Mortgages insured by the Federal Housing Administration have lower minimum credit score requirements: 500 with a 10% down payment and 580 with a 3.5% down payment. FHA loans charge mortgage insurance premiums at closing and annually, regardless of how much money you put down.
The U.S. Department of Veterans Affairs doesn’t set a minimum credit score for VA loans, which are available to active-duty military members, veterans, and surviving spouses. That means it may be possible to qualify with a low score. However, this is not guaranteed. VA mortgage lenders offering these mortgages set their own requirements.
VA loans don’t require a down payment or mortgage insurance, but borrowers will pay a one-time VA funding fee of 1.25% to 3.3% of the loan amount.
Like VA loans, the U.S. Department of Agriculture doesn’t have a minimum credit score. However, it’s common for USDA loan lenders to look for a score of at least 640.
Although there’s no down payment requirement for USDA loans, you’ll need to purchase a home in an eligible rural area and meet income requirements to qualify.
Conventional loans backed by Fannie Mae and Freddie Mac generally require a minimum credit score of 620. Many ask for a down payment of 3% or 5%. Certain programs for first-time home buyers or households with limited income may have looser credit score requirements.
Many conventional loans require a minimum credit score of 620. However, some government-backed home loans may allow scores as low as 500, provided you meet other criteria. You can still qualify for a mortgage with a lower credit score; however, lenders usually charge higher interest rates or fees to compensate for the added risk.
Government-backed mortgage loans may be easier to qualify for than conventional loans. FHA loans allow a 500 credit score with a 10% down payment and a 580 score with 3.5% down. USDA and VA loans don’t have credit score requirements, but you’ll need to find a partner lender with flexible credit qualifications.
Yes, lenders tend to charge higher interest rates to borrowers with lower credit scores. A low credit score can indicate that the borrower has challenges repaying debt, which lenders view as a risk. The higher rate offsets some of this risk. Lenders may also require a larger down payment or mortgage insurance, depending on which type of mortgage you get.
Laura Grace Tarpley edited this article.
