If you have a low credit score you may still be eligible to secure a home loan with these bad credit home loan programs.

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What do Lenders Consider Bad Credit?

Mortgage lenders set their own credit score requirements for home loans. While one lender may not help a borrower with a 580 credit score, another lender can get them approved. Most mortgages, and lenders, require a minimum 620 credit score. However, some home loans, such as FHA loans, require just a 580 credit score.

Credit Score Ranges

  • 720+ – Excellent credit
  • 680-719 – Good credit
  • 620-679 – Fair credit
  • 580-619 – Below Average credit
  • 579 and lower – Bad credit

Home Loans that Require a 580 Credit Score

Most programs require a 620 credit score, the following mortgage programs are available for borrowers with credit scores as low as 580.

FHA Loans

An FHA loan is a government-backed mortgage loan guaranteed by the Federal Housing Administration. Borrowers with a minimum credit score of 580 need just a 3.5% down payment.

VA Loans

VA home loans are home loans that require no money down, are for veterans, and are guaranteed by the Department of Veterans Affairs. A VA loan requires a 580 credit score and requires no mortgage insurance.

Credit Score Needed by Loan Type

Most mortgage programs require at least a 620 credit score to qualify, but this can vary depending on the lender you work with. While some lenders may be able to approve lower credit scores, others will have higher requirements.

USDA Loans – Minimum 640 credit score

USDA loans are a low-income mortgage program for buyers with a minimum 640 credit score looking to buy a house in a rural area. USDA loans are available to buyers whose income doesn’t exceed 115% of the area median income (AMI) and require a 620 credit score.

  • Minimum 640 credit score
  • No down payment
  • Income must be below 115% of AMI

Conventional Loans – Minimum 620 credit score

A conventional loan is a traditional home mortgage that is not guaranteed by the government but by private mortgage insurance companies. They require a 620 credit score with a down payment between 5% to 20%. No mortgage insurance is required if putting at least 20% down.

  • Minimum 620 credit score
  • 5%-20% down payment

Home Possible and HomeReady Loans – Minimum 620 credit score

The Home Possible and HomeReady loan programs were created for low-income first-time buyers. To qualify, you need a 620 or higher credit score, and your income cannot exceed 100% of the median income in the area. They are exclusively for first-time homebuyers and require a 3% down payment.

  • 620 credit score required
  • 3% down payment
  • Income must be below 100% of AMI

Non-Qualified Mortgage – 500+ credit score

A non-qualified mortgage loan is also called a subprime loan, or a portfolio loan. These are loans provided by groups of individual investors who want the security of mortgage investments with a higher rate of return. They will have an interest rate that is much higher than the current rates because they are considered high risk. To qualify for one of these loans you will need to have compensating factors that make up for having poor credit. A large down payment or having a high income is needed to be eligible for a non-QM loan.

Other Credit Guidelines

Lenders don’t just look at your credit score, they consider your entire credit history. 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 payment history.
  • Bankruptcy – Bankruptcy will not disqualify you from a home loan. There is a 24-month waiting period to be eligible for a mortgage after a bankruptcy, 12 months if you have extenuating circumstances.
  • Foreclosure – There is a 36-month waiting period after you have filed for bankruptcy. Some borrowers may qualify in 12 months with extenuating circumstances.
  • Late Payments – A single late payment will not automatically disqualify you. However, you should not have any more than one late payment on any of your accounts in the past 12 months.
  • Collections, Judgements, and Federal Debt – Lenders may verify that judgments and Federal debts have been paid or are on a 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 before closing.

Compensating Factors

Compensating factors are areas of strength in your loan application that can help make up for having bad credit such as being at your job for several years or having a large down payment.

Compensating Factors for Poor Credit

  • Low debt-to-income ratio
  • A large down payment
  • Three or more years with current employer
  • Limited debt (credit cards, auto loans, etc.)
  • Limited payment shock

Bankruptcy Waiting Period

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 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 rebounded and reestablished positive payment history since.

Down Payment Assistance Programs

Every state has homebuyer programs designed to help increase homeownership. These programs provide up to $15,000 to be used towards the down payment and/or closing costs for a home purchase. Click on the state below you plan on buying a home in for a list of all available programs.

District of Columbia
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Puerto Rico/U.S. Virgin Islands
Rhode Island
South Carolina
South Dakota
West Virginia

First-Time Homebuyers with Poor Credit

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 they qualify for any homebuyer programs.

Refinancing with Bad Credit

There are ways to refinance your mortgage with poor credit. Some refinance programs don’t even require a credit check. 

  • 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. A 660 credit score is required. If you have bad credit, then a home equity loan will be complicated to qualify for. 
  • Cash-Out Refinance – A cash-out refinance will pay off your current mortgage and provide you with cash up to 80% of the market value of the home. Cash-out refinancing requires a 620 credit score, making them a better option than home equity loans for borrowers who want to tap into their equity to get cash but have bad credit.
  • Home Equity Conversion Mortgage (HECM) – A HECM loan, also called a reverse mortgage, is used by homeowners who are at least 62 years old who want to tap into the equity in their home to create a steady stream of income or get a lump sum payment that does not need to be repaid. The lender will be repaid after death. Good credit is not required.

Tips for Getting a Mortgage with Poor Credit

  • Put more money down – The higher your down payment is, the less risky your loan is. A large down payment might overshadow your poor credit score allowing you to qualify for a home loan.
  • Pay down your debt – Paying down your debt will lower or eliminate some of your monthly payments. This will lower your debt-to-income ratio and make your loan application stronger. A DTI ratio of 36% is ideal.
  • Start working on your credit – Get a copy of your credit report and start disputing the negative accounts with the credit bureaus.

Improve Your Credit Score Before Applying

Before trying to get a home loan with bad credit, you should work on getting your score as high as it can be. Even if you do get approved, a higher credit score will help get you a lower interest rate on your loan. If you have a significant amount of negative accounts, you should use our free DIY credit repair guide.

  • Pay down credit card debt – Your credit utilization ratio is the amount of available credit you are using; it accounts for 30% of your overall FICO score. Pay down your credit cards to less than 25% of the card’s limit.
  • Don’t apply for credit – Do not apply for new credit lines or loans before getting a mortgage. 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 makes up for 35% of your overall score. It’s the biggest factor in determining your credit score. Don’t miss a payment on any bills. Set up auto-pay to ensure you don’t miss any payments.
  • Dispute Inaccurate 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.
  • Increase your credit limits – If your credit utilization ratio is high, then you can increase your credit score and lower your utilization ratio by asking your creditors to increase your credit limits on your cards.

Please read our article for more information on raising your credit scores quickly.

Frequently Asked Questions

Can I get an FHA loan with a 500 credit score?

The Federal Housing Administration guarantees mortgage loans for borrowers with a 500 credit score and a 10% down payment. However, finding lenders that will approve borrowers with a score below 580 has become increasingly difficult since the pandemic. You are better off increasing your score to at least 580 before applying for a home loan.

Will a bank approve a home loan with bad credit?

The only type of home loan you can get with poor credit is an FHA loan. Lenders can approve borrowers with at least a 580 credit score.

How can I improve my credit score before getting a home loan?

You can work on your improving your credit yourself with our DIY credit repair guide.

Are there any programs for first-time homebuyers?

Yes. If you’re buying a house for the first time you may qualify for down payment assistance through HUD. You can check on the official HUD website or on your local county website.

The Bottom Line

Getting a home loan with bad credit is possible with certain types of mortgage programs. FHA and VA loans are available to borrowers with a 580 credit score. However, lenders look at more than just your credit score when determining if you qualify for a home loan; 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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