Bad Credit Home Loans

Looking to buy a home soon but have credit issues? You may be in luck.

You could qualify for an FHA loan with just a 500 credit score and 10% down.

This article takes an in-depth look at the home loan options available to borrowers with bad credit.

Current Mortgage Rates (Novermber 2020)

Loan Term

Interest rate


30-year fixed-rate mortgage



15-year fixed-rate mortgage



5/1 adjustable-rate mortgage



Minimum Requirements by Loan Type

Loan Type

Min Credit Score

Down Payment

Max DTI Ratio

Income Limit

FHA Loan





VA Loan


No down payment





No down payment


115% of area median income

203k Loan





Conventional Loan


5% - 20%



HomeReady /Home Possible Loans




 80% of area median income

Conventional 97





FHA Loans

FHA home loans are the only type of mortgage loan you can get with a credit score below 620 unless you qualify for a VA loan. The FHA guarantees mortgage loans so the risk of lending is greatly reduced allowing lenders to lower their borrower requirements.

Borrowers with a 580 credit score or higher can qualify with just a 3.5% down payment. Borrowers with at least a 500 credit score may qualify with 10% down.

VA Loans

If you’re a veteran of the U.S. military you could be eligible for a VA loan which is the only other type of mortgage you can get a credit score below 620. VA loans have no credit requirements so lenders set their own minimum credit score. Most lenders require a 580-620 credit score.

USDA Loans

USDA loans are for low-income homebuyers who wish to buy property in rural areas of the country. They do require a 620 credit score, but borrowers who have credit issues will have an easier time qualifying for a USDA loan.

Conventional Loans

A conventional loan is a traditional home loan that requires a 620 credit score and between 3%-20% down. If you have bad credit a conventional mortgage is probably not going to be an option.

Credit Requirements

Lenders don’t just look at your credit score. They consider your entire credit history. Items like late payments, judgments, and collection accounts could cause your loan to be denied even if you meet the minimum credit score requirement.

No Credit History

If you have no credit history then mortgage lenders ask for alternative credit lines, such as rent and phone payments to establish positive payment history. 


Bankruptcy will not disqualify you from a home loan. There is a 24 month waiting period after a chapter 7 bankruptcy, 12 months if you have extenuating circumstances. Borrowers must re-establish positive payment history post bankruptcy.

Late Payments

A single late payment will not automatic disqualify you, however, you should not have anymore than one late payment on any of your accounts in the past 12 months


There is a 36 month waiting period after you have filed for a bankruptcy. Some borrowers may qualify in 12 months with extenuating circumstances.

Collections, Judgements, and Federal Debt

Lenders may verify that judgments and Federal debt have been paid or on am agreed upon payment plan. Collections will not disqualify you, if your total collection debt is over $2,000 your lender may require you to make payment arrangements prior to closing.

Bankruptcy and Foreclosure Guidelines

If you have gone through a bankruptcy, short sale, or been foreclosed on, there is a 3-year waiting period you have to go through before you’re able to qualify for a government home loan.

The FHA back to work program shortens the waiting period to just 12 months if you faced a financial hardship that led to your bankruptcy or foreclosure and have since rebounded and reestablished positive payment history.

Bankruptcy Waiting Period by Loan Type

Loan Type

Waiting Period

FHA, USDA, VA, 203k Loans

24 months
12 months with extenuating circumstances

HomeReady / Home Possible

36 months

Conventional Loan

36 months

Compensating Factors for Bad Credit

If you have bad credit, you will need to show compensating factors to strengthen your loan application.

You will also need to show a financial hardship because you fell behind on your monthly bills, and you have since recovered and have re-established credit. Usually, if you have poor credit, your loan will go through manual underwriting.

These compensating factors reduce the lender’s risk and increase your odds of getting approved with a poor credit history.

Compensating Factors

* Limited payment shock

* 5+ years with the same employer or in the same industry

* High income

* Large amount in savings

* Good credit

* 20% down payment

* Low debt-to-income ratio below 36%

* Residual Income

* Limited debt (credit cards, auto loan, etc.)

First-Time Homebuyers

FHA loans have become a very popular mortgage for first-time homebuyers because of their low credit and down payment requirements. This also makes it easier to qualify for than a conventional loan.

FHA loans also allow gift funds for the down payment. 100% of the down payment can be a gift from a friend or family member. First-time buyers may be able to buy a home with no down payment if you qualify for any homebuyer programs.

Down-Payment Assistance Programs and Grants

You may be able to qualify for down-payment assistance or Federal Grants. Visit your local county website to see if they offer down payment assistance or grants for first-time homebuyers.

Search the HUD website to find local state programs. Your city or county should also have any available programs listed on their website.

Where to find lenders that work with bad credit?

Lenders set their own credit score requirements. Finding a subprime mortgage lender who can work with a 580 credit score is not always that easy.

You should be careful about giving up your personal information to just anyone. Make sure you are applying with reputable mortgage lenders.

There are many online lenders out there that offer home loans to people with bad credit. You need to make sure you find the best mortgage company for your situation.

Getting Pre-Approved

You need a pre-approval letter to make an offer on a home. Most Realtors will not even show you any properties unless you are pre-approved.

A pre-approval letter means that a lender has checked your credit report, verified your income, reviewed tax returns and bank statements, and you qualify for a mortgage based on the information provided.

It is not guaranteed approval, just a high likelihood of mortgage approval.

Get Pre-Approved for a Mortgage

How to Increase your Score to Improve Your Chances of Getting Approved

Before trying to get a home loan with bad credit, you should work on getting your score as high as it can be. The higher your score, the better odds you have of getting approved for a mortgage. If you have a significant amount of negative accounts, you should use our free DIY credit repair guide.

You can get a free copy of your credit report once per year at Go through your report and search for any errors. You can dispute items you believe to be inaccurate with the credit bureaus directly.

Tips to Raise your Credit Score Before Applying

Pay down credit card debt

Your credit utilization ratio is the amount of available credit you're using; it accounts for 30% of your overall FICO score. Try to pay your balances to less than 10-15% of the card's limit.

Don't apply for credit

Do not apply for new lines of credit or loans. Too many credit inquiries can lower your credit score. You're also adding debt to your report, which can negatively affect your score.

Pay your bills on time

Your payment history accounts for 35% of your overall score. Don't miss a payment on any bills, set up auto-pay to ensure you don't miss any payments.

Dispute Innaccurate Items

You can dispute accounts you don't believe are accurate with the credit bureaus directly. They will investigate the account and must either verify it or delete it within 30 days.

Get added as an authorized user

If you know someone who has a credit card in good standing with no negative account activity ask them to add you to their account as an authorized user. The entire account history will be added to your credit profile which can increase your credit score.

Please read our article for more information on raising your credit scores in a hurry.

Refinance Options with Bad Credit

The Government created these refinance programs to help reduce the number of foreclosures by allowing people who are upside down on their mortgage or have low credit scores to refinance into a lower payment and rate.

HARP – The Obama Administration created the Home Affordable Refinance Program to help Americans underwater on their mortgage to refinance into a lower rate and payment. The HARP program is available for mortgages owned by Freddie Mac or Fannie Mae.

Streamline Refinance – If you have a government home loan, you may qualify to refinance your home using a streamlined refinance program. Streamline refinances do not require a credit check or income verification. Streamline refinancing is a great way for borrowers with government loans to refinance to a lower rate without a ton of documentation.

Home Equity Loans and HELOC – A home equity loan is where you use the equity in your home as collateral for a loan. It is also known as a second mortgage. With a HELOC, you can tap into your equity with a credit line that works similarly to a credit card.

If you have bad credit, then a home equity loan will be complicated to qualify for. A cash-out refinance is easier to be eligible for people with poor credit scores.

The Bottom Line

Credit requirements for a mortgage have relaxed a little since the 2009 housing market crash. FHA loans are available to borrowers with credit scores as low as 580.

Lenders look at more than just your credit score; your complete credit history is reviewed. Things like late payments, collection accounts, and high credit card balances can affect your eligibility as well.

Ensure you go through your entire credit report to ensure it is accurate and clean up any negative information.

Getting a mortgage with bad credit can be difficult, but it’s not impossible.

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