Looking to buy a home soon but have credit issues? You may be in luck.
There are home loan programs for buyers with less than perfect credit.
This article takes an in-depth look at the home loan options available to borrowers with bad credit and tips to help you get approved.
Minimum Credit Requirements by Loan Type
HomeReady / Home Possible Loan
FHA 203k Rehab Loan
Conventional 97 Loan
Can You Buy A House With Bad Credit?
The Federal Housing Administration guarantees FHA loans for buyers with bad credit scores down to 500. If you have a 500 credit score a 10% down payment is required, just a 3.5% down payment is needed if you have at least a 580 credi score. VA loans are also available to veterans with a 580 credit score.
Home Loans for Borrowers with Bad Credit
FHA loans are a government-back home loan that is guaranteed by the Federal Housing Administration. They have the lowest credit score requirements of any type of home loan. Borrowers with a 500 credit score may qualify with a 10% down payment. Borrowers with a minimum credit score of 580 need just 3.5% down.
- 3.5% down payment with a minimum 580 credit score
- 10% down payment with a minimum 500 credit score
VA loans are home loans that require no money down and is for veterans of the U.S. military and guaranteed by the Department of Veterans Affiars. VA loans require a 580 credit score and offer 100% financing. No mortgage insurance premiums are required regardless of the down payment amount.
- Minimum 580 credit score
- 100% financing
- No mortgage insurance required
USDA loans are a low income mortgage program for buyers with a minimum 640 credit score looking to a buy a house in a USDA-eligible rural location. 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
A conventional loan is a traditional home mortgage that is not guarnaateed 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
The Home Possible and HomeReady loan programs were created for low-income first-time homebuyers. 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
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 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.
If you have poor credit, you should have strengths in other parts of your mortgage application. It could be a large down payment or a low debt-to-income ratio.
Compensating Factors for Poor Credit
- Low debt-to-income ratio
- A large down payment
- 5+ years with the same employer
- Limited debt (credit cards, auto loan, 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.
Bankruptcy Waiting Period by Loan Type
FHA, USDA, VA, 203k Loans
HomeReady / Home Possible
First-Time Homebuyers with Bad 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 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. 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.
Can I Refinance 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 to Getting a Home Loan with Bad 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. This is the same process credit repair companies use to improve client’s credit scores. When you dispute an account on your credit report, the credit bureau has 30 days to investigate and verify it with the creditor, or they will remove it from your credit report entirely.
Raise Your Credit Score Before Applying for a Mortgage
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 annualcreditreport.com. 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 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.
- 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.
- Negotiate a pay for delete – A pay for delete is an agreement between you and the collection agency that they will remove the derogatory account from your report when you pay off the account.
- 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.
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 could have no problem getting them approved.
For conventional mortgages, the minimum credit score requirement is 620. If your score is below 620, there are some government home loans you can qualify for with bad credit.
For example, FHA loans may be an option for homebuyers with a 500 credit score and a 10% down payment. Buyers with at least a 580 credit score can qualify for an FHA mortgage with just a 3.5% down payment.
Credit Score Ranges
- 720+ – Excellent
- 680-719 – Good
- 620-679 – Fair
- 580-619 – Below Average
- 579 and lower – Bab
How Your Scores Are Calculated
How Your Credit Score is Calculated
Payment history is how well you pay your bills on time. This includes late payments and collection accounts.
The amount of available credit you're using is called your credit utilization ratio. Try to keep your credit utilization ratio below 25%.
Length of Credit
The longer your accounts stay open, the better your score will be. Don't close credit cards is possible.
Types of Credit
A mix of credit accounts such as credit cards, auto loans, mortgages will help improve your credit score.
Credit Inquiries & New Accounts
When a lenders pulls your credit it creates a hard inquiry. Multiple inquiries hurt your score count against you for 12 months.
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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