How To Get A Mortgage With Bad Credit (2024)

Can you get a mortgage if you have bad credit? With certain loan programs and lenders, it may be possible—especially if you can make a big down payment, prove large cash reserves and have a low debt-to-income ratio.

About 15%of American consumers have credit scores in the 500 to 599 range on an 850-point scale, which is considered poor to fair credit, according to FICO. Another 10% are in the 600 to 649 range, which is considered fair credit.You’re in good company if your score is less than ideal, and the right lender can help you get a mortgage or explain how to get approved in the future.

What Is a Bad Credit Score for a Mortgage?

A bad credit score for a mortgageis one that doesn’t allow you to get a loan, only lets you get a more expensive loan or requires a larger down payment in order to qualify for a loan. What’s considered “bad” depends on the type of loan you’re applying for: conventional, FHA, VA or USDA. Most successful homebuyers—about 93%—have credit scores of 650 or higher, according to Ellie Mae, a technology solutions provider for mortgage lenders.

A steady income, a small amount of debt compared to your income and a significant down payment can help you get a mortgage despite a bad credit score. But if your score is below 500, you’ll almost certainly be rejected. A recent foreclosure or bankruptcy can also really hurt your score and keep you from getting a loan for at least one year—and possibly several years.

What Is the Minimum Credit Score to Get a Mortgage?

The minimum credit score to get a mortgage depends on which type of mortgageyou’re applying for. It also depends on which lender you’re working with. Some lenders are more willing to work with low-credit-score borrowers than others.

Conventional Mortgage Credit Score Requirements

Conventional mortgageshave the strictest credit score requirements, but they’re still more lenient than you might think.

Freddie Mac and Fannie Mae, the two huge companies that help make conventional mortgages widely available, have strict credit score requirements for borrowers making the minimum down payment of 3%: Freddie Mac’s minimum credit score is 660 and Fannie Mae’s is 620. Freddie will allow a credit score as low as 620, too, but only with a down payment of at least 25%.

Most lenders follow these rules because after they close your loan, they sell it to one of these companies. The table below shows how few borrowers get conventional loans with credit scores below 700.

Sometimes lenders grant exceptions if a borrower’s credit score is below the minimum because the borrower doesn’t have enough credit history. However, that’s different from having a bad credit history. It’s only an option if the items that do appear in that limited history aren’t derogatory and if the borrower can prove their creditworthiness with verifiable payments that don’t appear on traditional credit reports, such as rent or utilities.

Conventional borrowers who barely make the credit score cut-off will usually need a debt-to-income ratio no higher than 36% and must be buying the home as their primary residence. Lenders may also require at least two months of cash reserves.

FHA Loan Credit Score Requirements

You can get an FHA loan with a credit score as low as 500. However, if your score is 500 to 579, be prepared to put 10% down. With a score of at least 580, you can put down just 3.5%.FHA loans have the second-loosest credit score requirements after VA loans and are quicker than conventional loans to offer borrowers a second chance after a bankruptcy or foreclosure.

Still, you might find that some FHA lenders will not work with you unless your score is at least 620. They’re allowed to have their own, stricter requirements. As a result, you may have to put more work into loan shopping if your score is below 620. Most FHA borrowers have credit scores in the 650 to 699 range, as the table below shows.

VA Loan Credit Score Requirements

VA loanshave the most generous credit score requirements: there’s no minimum credit score. No other mortgage offers this benefit, but these loans are only open to eligible military service members, veterans and surviving spouses.

Like FHA loans, they’re more forgiving of negative credit events, but again, lenders can set their own minimums and might require a higher score. The average homebuyer who closed on a VA loan within the last year and a half had a credit score in the low 700s.

USDA Loan Credit Score Requirements

USDA loans have different credit score requirements depending on the program and the lender. Section 502 Guaranteed Loans, for example, don’t have a minimum credit score requirement. USDA mortgages are available to low- to moderate-income borrowers who want to buy a home in an area with a population of less than 35,000.

Low Credit Score Costs

On a 30-year fixed-rate mortgage for $150,000, having a credit score of 620 to 639 could cost you tens of thousands of dollars more over 30 years compared to having a credit score of 760 or higher. Check out the table below to see how much more you’d pay.

Still, 4.5% is, historically speaking, a great interest rate. There’s hardly been a more affordable time to get a mortgage if you have bad credit.

Improving Your Credit Score Vs. Getting a Mortgage Now

You could spend several months or more improving your credit. But what will happen to interest rates during that time?

• If they go up, you may not save any money despite your improved credit.
• If they go down, you could save money from both your improved credit and the market’s lower rates.

No one knows where interest rates are headed. The country’s most educated guess comes from the Federal Reserve, so that’s a good source to consult.

In the press release section of the Federal Reserve website, look for the most recent economic projections from the Federal Open Market Committee (FOMC). Do they think the federal funds rate is headed up or down?

If they think it’s headed up, mortgage rates could be headed up. Right now, they expect the federal funds rate to stay around zero through 2021 and possibly 2022. But that’s a prediction, not a guarantee.

5 Tips for Getting a Mortgage with Bad Credit

1. Know your options. If you can’t qualify for a conventional mortgage, what about a VA, USDA or FHA loan?
2. Don’t give up easily. You may hear a lot of no’s from lenders before you hear a yes.
3. Try a mortgage broker. They may know which lenders are the best match for your circ*mstances. (Lenders pay mortgage brokers; their services are free to borrowers.)
4. Spend a few months improving your credit before applying for a mortgage. Paying down high-balance credit cards, making on-time payments and disputing credit report errors can help your score considerably.
5. Save up a down payment of at least 10%. Lenders will see you as less risky when you have more skin in the game.

When You Should Ask for a Rapid Rescore

You should ask for a Rapid Rescorewhen you’ve taken actions that will boost your credit score, such as paying off a judgment or an account in collections, but your score won’t reflect those changes fast enough to benefit your mortgage application.

Rapid Rescore can update your score, well, rapidly—not after the 30 days or more it could take through the usual process. Your lender can request a Rapid Rescore on your behalf, but you can’t request it on your own.

When You Should Rent Vs. Buy

Your credit score can offer insight into whether you should rent or buy. Lenders use your credit score as a crystal ball to predict how likely you are to repay a mortgage. But they don’t actually know you. What do you think about your credit score? Does it say more about the type of borrower you are today or the type of borrower you were in the past?

If you have a bad score because you didn’t understand how to manage credit, but you’ve learned since then; because you went through a rough patch, but you’re fine now; or because a divorce or identity theft trashed your credit, you might be comfortable buying a home now if you can get a loan despite your credit score.

If you have a bad credit score because you’re not good at making payments on time or you tend to overspend, renting while you improve your habits is probably the wiser option.

Bottom Line

Some people aren’t going to qualify for a mortgage, period. And some people won’t have the mitigating factors they need—like 10% down—to qualify despite having bad credit.

But having bad credit doesn’t have to stand between you and your desire to own a home. Credit history is only one piece of your overall financial picture. If you have the income and savings to afford a home, buying may be the right choice for you, even if you have to look harder for a lender or pay a higher interest rate.