How to Get A Home Loan with Bad Credit

low credit score mortgage programs

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

You could qualify for an FHA loan with just a 500 credit score.

In this article, we will review the different bad credit home loan options available to borrowers with credit issues.

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Mortgage Programs for Borrowers with Poor Credit

FHA Loans

Credit Score

Down Payment

500-579 credit score

3.5% down payment

580+ credit score

10% down payment

FHA home loans were created by the Federal Housing Administration in 1934 to increase homeownership in America. By ensuring mortgage loans, the risk lenders face is greatly reduced.

It is much easier to qualify for this Government home loan than a conventional mortgage because of the lenient loan requirements.

2020 FHA Loan Requirements

• 580 credit score with 3.5% down

 500-579 score with 10% down

 Maximum 50% debt-to-income ratio

• Two years of stable employment and income history

 For primary residence only

 24 month waiting period after a foreclosure or bankruptcy

1% of student loan debt added to DTI ratio

Credit Requirements

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

FHA Credit Requirements

• No more than one late payment on any account in the past 12 months

• No late mortgage payments in the past six months

• Two year waiting period after bankruptcy or short sale

 Three year waiting period after a foreclosure

• Collections, judgements, and federal debt should be paid or on a payment plan

VA Loans

If you’re a Veteran, you may be eligible for a VA home loan. VA loans have many benefits, including no money down and no mortgage insurance.

The VA does not have a minimum credit score requirement. However, most lenders will require a 620 or higher FICO score. Some VA lenders may be able to work with a 580 credit score in some situations.

VA Loan Eligibility Requirements

• Active-duty service member

• Current or former activated National Guard or Reserves

• Surviving spouse

• Discharged member of the National Guard or Reserves and never activated

• Discharged member of the National Guard and were never activated

USDA Loans

The U.S. Department of Agriculture created the USDA home loan program to encourage homeownership in rural areas of the country. These rural loans are specifically for low-to-moderate-income families.

When you think of the word “rural,” you think of farms and the open road. However, more than 90% of the country is in a USDA eligible location. Check the USDA map here.

USDA home loans, like VA loans, are a 100% financing home loan. There is no down payment, but the minimum credit score needed is higher than FHA.

Most lenders will require a 640 credit score to qualify for a USDA home loan. Section 205 Direct Rural Loans are slightly riskier because they require no money down.

2020 USDA Loan Requirements

• 640 minimum credit score

• Total household income less than 115% of the average in your area

• Maximum 43%-50% debt-to-income ratio

• Two years of stable employment history

• Occupy the property as your primary residence

• Prove of income (Two years of tax returns and W2's)

• Must be in an eligible rural area

• Work with an approved USDA lender

FHA 203k Home Improvement Loan

For the buyer that is interested in getting a home that is need of repairs or needs renovations, there is the FHA 203(k) home loan.

A 203k loan gives you the funds to buy the home plus gives you additional cash to make repairs. There are two types of FHA 203k loans, streamline and standard.

A streamline 203k loan is a quick and easier loan process for necessary cosmetic repairs. If the property needs significant repairs such as plumbing or foundation, then a standard 203k loan will be required.

The FHA 203k loan has the same requirements as an FHA loan, except they require a good credit score. Typically you will need a 640 FICO score to qualify for a 203k loan. Fannie Mae HomeStyle Renovation Mortgage A HomeStyle renovation mortgage works similarly to a 203k loan. 

You are given the funds to purchase a home plus additional money to make repairs or renovations. The benefit of this loan is that the loan for the home and rehab are combined into one money payment.

You will not have a second mortgaged; the terms are usually much more favorable than if you had to get a home equity loan.

2020 FHA 203k Loan Requirements

Minimum 620 credit score

24 month waiting period after a bankruptcy or foreclosure

 Maximum 43%-50% debt-to-income ratio

• For primary residence only

Check out our mortgage calculator to see how much house you can afford

Mortgage Refinance Options with Bad Credit

There are also programs to help people with bad credit refinance their existing mortgage.

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

HARP – In 2010, the Obama Administration created the Home Affordable Refinance Program to help Americans who were underwater on their mortgage be able to refinance into a lower rate and payment. The HARP program is available for mortgages owned by Freddie Mac or Fannie Mae.

FHA Streamline Refinance – If you have an FHA loan, you may qualify to refinance your home using this program. Streamline refinances do not require a credit check or income verification. FHA and VA streamline refinances are a great way for borrowers with a Government loan to refinance into a lower rate without perfect credit.

Home Equity Loan 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 line of credit 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.

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.

There is a program called the FHA back to work program that shortens the waiting period to just 12 months to those who qualify.

To be eligible for the program, you’ll have to show you had an unforeseen financial hardship that caused the event that you must re-establish credit.

You cannot have any late payments or collection accounts since the bankruptcy or foreclosure was dismissed.

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 a poor credit rating, then you will need to show some compensating factors that help make up for it.

You will also need to show a financial hardship was the reason 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 risk to the lender 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 with Poor Credit

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 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 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 the best bad credit lenders?

Each lender sets their own credit score requirements. Finding a subprime mortgage lender who can work with a 580 credit score is not always as easy as you may think.

If you google 580 credit score lenders, many results will pop up.

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

Mortgage Calculator: See how much you house you qualify for

Credit Scores

Your credit score represents the likelihood you will be 90 days late on a loan. FICO, the credit scoring company used by mortgage lenders, grades your credit score ranging from 300-850.

  • 720 and higher = Excellent credit
  • 680 to 719 = Good credit
  • 640 to 679 = Fair credit
  • 580 to 639 = Poor credit
  • 579 or lower = Bad credit

Get Your Free Credit Score

First, you should review your credit history and find out how bad your score really is. If it’s too low then you should work on improving it before applying for a home loan.

You can get your free credit score and report from these trustworthy websites.

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.

If you have a lot of debt, then a debt consolidation program may be an excellent option to help you pay off your debt quicker and at a lower interest rate.

Tips to raising your score for a home loan

  • Pay down the balances on your credit cards
  • Do not miss any credit card or loan payments
  • Do not have too many credit inquiries
  • Dispute negative information
  • Contact creditors to delete collection accounts if you pay them
  • Get added as an authorized user
  • Get a secured credit card

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

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.

Make sure you go through your entire credit report to ensure it is accurate and work on cleaning up any negative information.

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

Speak to one of our lenders to see if you qualify today.

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