This is a simple guide of how to get home loans with bad credit in your credit history. Normally, homebuyers with poor credit may not know that they can they have several options for getting home loans. There are different loan programs that can help people with bad credit, and many lenders usually consider applicants with less-than-perfect credit histories.
Can I Find home loans for bad credit?
Yes, you can get a mortgage even if your credit isn’t great. But before we get into how to do that, let’s first understand how lenders look at your credit scores and money situation when you’re trying to buy a house with not-so-good credit. Also, it’s important to know what “bad” credit means.
How do lenders Assess your Credit?
When you ask for a home loan, lenders check your credit scores and your overall money situation. The word “bad” isn’t officially used for credit scores, but people often use it to describe scores that are close to the lowest limit for a certain loan. Specific mortgage requirements vary by lender and loan program. It could also mean your credit history shows one or more of these things:
- Multiple late payments
- High balances on credit cards and loans
- Multiple new accounts
- Debts sent to collections
- Loan default
- Bankruptcy
- Foreclosure
- Short sale
Lenders care about your credit score because it shows how safe it is to give you a loan. But, even if two people have the same credit score, they might have reached that score in different ways. So, lenders might look at their situations in slightly different ways too.
What is a Bad Credit Score in Mortgage?
If someone or a business doesn’t pay their bills on time or owes a lot of money, they’re seen as having bad credit. For people, this usually means having a low credit score, usually below 580 on a scale from 300 to 850.
There are three main credit bureaus: Equifax, TransUnion, and Experian. They calculate different types of credit scores. But, many lenders rely on FICO Scores from Fair Isaac Corp. These scores range from 300 to 850, with the average in the U.S. being 714. Here are the FICO Score categories:
| Credit score range | Rating |
|---|---|
| 800-850 | Exceptional |
| 780-799 | Very good |
| 740-779 | Very good |
| 670-739 | Good |
| 580-669 | Fair |
| 300-579 | Poor |
Even if you have “bad credit,” it might not completely stop you from getting a home loan. What’s more important is realizing how your credit score will impact your journey to becoming a homeowner.
Helpful Insights
- Bad Credit Score: How Does it Affect Your Credit Loan Application
- 11 Ways to Quickly Get Out of Debt and Rebuild Your Credit Score
- Home Equity Lines of Credit (HELOCs) What it is and How to Access it
| Credit score range | Borrower classification | Consequences for borrowers |
|---|---|---|
| 780 and above | Optimal | The lowest possible closing costs and interest rates |
| 740 and above | Superprime | The lowest possible interest rates |
| 720 and above | Superprime | Very good odds of being approved for most loans |
| 680 and above | Prime | Good odds of being approved for most loans |
| 620-679 | Nonprime | Less likely to be approved for a loan and may see higher interest rates and lower loan amounts |
| 540-619 | Subprime | May struggle to get approved for a loan |
| 539 and below | Deep subprime | May struggle to get approved for a loan |
When you’re trying to buy a home with bad credit, your credit score is a significant factor that mortgage lenders will take into account. It’s important because it shows the level of risk you pose to the lenders.
Good news for borrowers with “good,” “fair” or “poor” credit. New updates to the rules for conventional mortgages, referred to as loan level price adjustments (LLPAs), are bringing some relief to individuals with credit scores lower than 680. While having a lower credit score may still result in added costs, Fannie Mae and Freddie Mac are minimizing the extent of the penalties. This is particularly beneficial for first-time and repeat homebuyers with lower scores, especially if they have a reasonable down payment, as they can expect substantial savings.
5 Loan Options to buy a Home with Bad Credit
If you want to know how to buy a house with bad credit, they take a look at the five (5) loan options you can access.
| Loan program | Minimum credit score | Minimum down payment | DTI ratio* |
|---|---|---|---|
| FHA loans | 500 | 3.5% with a 580 credit score or higher 10% with a 500-579 credit score | 43% |
| VA loans | None, but most lenders look for 620 | No down payment required | 41% |
| USDA loans | None, but most lenders look for 640 | No down payment required | 41% |
| Fannie Mae HomeReady® loans | 620; borrowers without credit scores can use alternative data | 3% | 45% |
| Freddie Mac Home Possible® loans | 660; borrowers without credit scores can use alternative data | 3% | 45% |
In our previous guide, there are 12 Loan Programs that First Time Homeowners can qualify and benefit from in United States.
Related Posts
- The Importance of Regularly Checking Your Credit Report
- Rebuild Your Credit Score After Repossession for Missing Payments
- Credit Line: Difference between Closed-End Credit versus an Open-End
- Remove Repossession Report from your Credit Report to Boost Your FICO
1. FHA loans
If you’re looking to purchase a home with bad credit, a mortgage backed by the Federal Housing Administration (FHA) can be a good choice. FHA lenders tend to have more flexible eligibility criteria. You can qualify for an FHA loan with a minimum credit score of 500 if you put down 10% or more. To make the minimum 3.5% down payment, you’ll need a credit score of at least 580.
FHA loans also offer shorter waiting periods after major credit setbacks, like foreclosures, bankruptcies, judgments, or tax liens, compared to conventional loans. However, to balance the added risk from these more accommodating requirements, FHA loans come with two types of mortgage insurance premiums: (i) upfront and (ii) annual.
2. VA loans
VA loans are a great option for active-duty service members, veterans, and eligible spouses. These loans, supported by the U.S. Department of Veterans Affairs (VA), don’t demand any down payment. Although there isn’t a strict minimum credit score requirement, many lenders prefer a score of 620 or higher. Keep in mind that VA loans involve a funding fee, which is a percentage of the loan amount. You can choose to pay it upfront during closing or include it in the loan.
3. USDA loans
If you live in a rural area, you might be eligible for a mortgage through the U.S. Department of Agriculture (USDA loan) or a lender approved by USDA. These loans are meant for people with lower to moderate incomes and are available in specific rural areas, usually determined by the local population size.
4. Fannie Mae HomeReady® loans
Even if you don’t have a traditional credit score, you could still get approved for a HomeReady® loan. Instead of a credit score, you can use other forms of credit history like your bill payment record. The down payment requirement is at least 3%, but if you’re putting down less than 20%, you’ll have to pay for private mortgage insurance (PMI).
5. Freddie Mac Home Possible® loans
Just like HomeReady®, Freddie Mac’s Home Possible® program is open to borrowers without credit scores. If you don’t have a credit score, you’ll need a minimum down payment of 5%. If you do have a credit score, the minimum down payment is 3%. However, if your down payment is less than 20%, you’ll have to pay for private mortgage insurance (PMI).
Lender options for bad credit home loans: Bad credit mortgage lenders
Below are a few lenders you might choose if you’re ready to apply for a home loan with a low credit score:
| Lender | Good for: | Minimum credit score | Minimum down payment |
|---|---|---|---|
| Carrington Mortgage Services | FHA loans with low credit | 500 | 3.5% |
| Carrington Mortgage Services | VA loans with low credit | 500 | 0% |
| Guild Mortgage | FHA loans with low credit | 540 | 3.5% |
| Sebonic Financial | FHA loans with low credit | 550 | 3.5% |
| Rocket Mortgage | VA loans with low credit | 580 | 0% |
| Homepoint Financial | VA loans with low credit | 580 | 0% |
How to boost your credit score instead of getting a Home Loans with Bad Credit
Follow this guide if you want to know How to boost your chances of being approved for a bad credit home loan.
- Check Your Credit Report: Review your credit report for errors or inaccuracies that could be affecting your score negatively. Dispute any errors you find.
- Pay Bills on Time: Consistently paying your bills on time can help improve your credit history over time.
- Reduce Debt: Work on paying down your existing debts, as lower debt levels can positively impact your credit score.
- Establish Stable Employment: Lenders like to see a steady income and job history, so maintaining stable employment can improve your chances.
- Save for a Down Payment: A larger down payment can show your commitment and reduce the risk for lenders.
- Explore Loan Programs: Research and consider loan programs specifically designed for borrowers with bad credit, such as FHA, VA, USDA, or specialized bad credit home loans.
- Improve Debt-to-Income Ratio: You have to show financial improvement. Lowering your debt and increasing your income can improve your debt-to-income ratio, making you a more attractive borrower.
- Get Pre-Approved: Prepare a strong explanation. Look for pre-approval from lenders to understand what you can afford and to demonstrate your seriousness to potential sellers.
- Work with a competitive Mortgage Broker: Mortgage brokers have access to multiple lenders and can help match you with a loan program that suits your situation.
- Be Patient, Honest and Transparent: Provide accurate and complete information to your lender to build trust and ensure a smooth application process.
How to boost your chances of being approved for a bad credit home loan – Home Loans for Bad Credit
Even if you earn a modest income, have a lower credit score, or unfavorable credit history, there are ways to enhance your likelihood of securing a home loan despite bad credit.
Try to Know your credit reports details
Data in a computer is entered by employees who are likely to make mistakes. Therefore, incorrect details might occassionally appear on your credit reports. It’s important to be “up to date” by obtaining copies of your credit reports from the three major credit bureaus through AnnualCreditReport.com. Prior to exploring bad credit home loans, carefully review these reports to identify any errors.
Remove already paid debts and data errors from your credit report
If you come across any inaccurate details on your credit report, you can use these steps from “Federal Trade Commision” to file disputes and have the errors corrected. It’s also important to note that if you’ve had past payments sent to collections, they might still appear on your report even if you’ve settled them.
In some situations, you can ask the lender to remove the entry from your report, or you might propose to pay off an outstanding debt in exchange for its immediate removal. Keep in mind that your creditor is not obligated to agree, but there are cases where they might agree to such arrangements.
Pay more to Increase your down payment
Making a larger down payment can greatly increase your chances of approval, as it shows lenders that you’re a less risky borrower. For FHA loans, a higher down payment can even allow you to qualify with a credit score as low as 500. Moreover, a bigger down payment can lead to a better mortgage rate and reduced closing costs.
Creating a budget to cut down on expenses or taking on a side job to boost your income can help you save up for a larger down payment. Making use of any huge sums of money you receive, like tax refunds or bonuses, for your down payment is also a good idea. Additionally, if you have family or friends who are willing and able, you can ask them for a gift of money to contribute toward your home purchase.
Pay down debt and lower your Debt-to-income (DTI)
Lenders look at your debt-to-income (DTI) ratio to decide if you qualify for a loan. To find your DTI ratio, divide your total debt (including your mortgage) by your monthly income. When buying a house with bad credit, it’s best to aim for a ratio below 43%. Keep in mind, though, that DTI requirements can differ depending on the loan and lender you’re working with.
Conventional loan DTI changes in 2023 Since May 1, 2023, if you have a conventional loan and your debt-to-income ratio (DTI) is over 40% and you're borrowing more than 60% of your home's value, you may face additional fees during the closing process. These fees linked to your DTI can range from 0.25% to 0.375% of your total loan amount.
You can improve your DTI by either paying off some of your debts or increasing your income. Both approaches can help lower your DTI and make you more appealing to lenders.
Work on your Track record of on-time payments
Try to show financial improvement. Paying your bills on time is really important for your credit score, making up 35% of your FICO Score. If you consistently pay your bills on time, it can boost your credit score and make it more likely for you to get a home loan even if you have bad credit. If you’ve had a habit of paying late, it might be a good idea to wait a bit before applying for a mortgage so that it doesn’t affect your loan terms too much.
Shop around for lenders and Apply with Multiple Lenders:
When you’re looking for lenders for a bad credit mortgage, remember that the requirements and rates can differ depending on the type of lender. For instance, a local credit union might be more lenient than a big national bank, and an online lender might have a special loan program that could work for you. It’s important to check out different lenders, compare their rates and terms, and see which one suits you best.
Research and Find a Cosigner or Co-borrower
While not all loan programs permit it, there are situations where you can have a cosigner or co-borrower to increase your income. This can significantly impact your DTI and the amount you’re eligible to borrow. For instance, FHA loans typically require you to live in the purchased home, but they do allow you to include the income of a co-borrower or cosigner from another state to qualify for the mortgage, even if they won’t be residing in the home with you.
Look for Competitive Rates and get lower loan amount
A simpler way to improve your chances of qualifying is to consider borrowing a bit less money. One option gaining popularity, particularly in rural areas, is purchasing a manufactured home. These modern manufactured homes often resemble traditional homes and are more affordable, costing around $72 per square foot, compared to the average cost of $144 per square foot for a conventional site-built home.
Is it good to get a bad credit home loan or wait for savings?
If you’re purchasing a home with bad credit, lenders view you as a higher risk, which leads them to charge a higher interest rate compared to someone with excellent credit. This high interest rate results in a more expensive loan over the duration of the mortgage. However, there are some best strategies to improve your Credit Score from 500 to 800.
This is an Example for Home Loans for Bad Credit Explanation
Let’s take a look at how a low credit score can affect the interest rate and total interest paid on a $350,000, 30-year fixed-rate mortgage. Keep in mind that this example doesn’t include property taxes, homeowners insurance, mortgage insurance, or additional fees.
| Credit score | APR | Monthly payment (principal and interest only) | Total interest paid |
|---|---|---|---|
| 760-850 | 6.208% | $2,145 | $422,365 |
| 700-759 | 6.430% | $2,196 | $440,614 |
| 680-699 | 6.607% | $2,237 | $455,293 |
| 660-679 | 6.821% | $2,287 | $473,189 |
| 640-659 | 7.251% | $2,388 | $509,628 |
| 620-639 | 7.797% | $2,519 | $556,775 |
The differences in interest rates between different credit score ranges may seem small, but these slight differences accumulate over the loan’s duration. In our illustration, a person with a credit score of 639 could potentially save $101,482 by raising their credit score to 680. Depending on your situation, it might be financially beneficial to wait and enhance your credit score before purchasing a home with bad credit, as this could lead to substantial long-term savings.
Frequently Asked Questions about Home Loans for Bad Credit
What do we call a bad credit score?
Credit scores can differ due to various scoring models, resulting in different classifications of scores. Yet, the most commonly used credit scores are FICO Scores, which span from 300 to 850. Within the FICO scale, a credit score falling below 580 is considered “poor.”
Will I pay for higher closing cost with bad credit?
The amount you pay for closing costs can vary based on the loan type, the price of the home, and other considerations. For example, VA loan recipients have a funding fee, and FHA loan recipients cover an upfront mortgage insurance premium. Some borrowers might be able to include these fees in their loan total.
Purchasing a house with bad credit doesn’t necessarily mean you’ll always pay higher mortgage insurance costs. The kind of loan you opt for and your down payment will dictate this. For instance, FHA loans include both upfront and annual mortgage insurance premiums. With conventional loans, if your down payment is less than 20%, you’ll usually pay private mortgage insurance (PMI), regardless of your credit score.
Will I have more mortgage insurance premium with bad credit?
Anyone who buys a home with poor credit doesn’t necessarily mean he/she will higher mortgage insurance premiums. The kind of loan and the down payment you choose influence this aspect. For example, FHA loans involve upfront and annual mortgage insurance premiums. In the case of conventional loans, if your down payment is below 20%, you’ll typically incur private mortgage insurance (PMI) expenses, regardless of your credit score.
Should I look for a Cosigner for a Mortgage?
You can include a cosigner on a home loan, which is a great option, but it’s important to approach this decision seriously. When someone becomes a cosigner, they are responsible for the loan if you fail to make payments. This could potentially impact their own creditworthiness, so it’s a significant commitment for them.
Can I refinance my bad credit score mortgage?
Simple answer is yes. Refinancing a mortgage with bad credit is possible, but it’s important to understand the details of your existing loan. If your credit situation has improved since you initially bought the home, you might be eligible for a lower interest rate or more favorable loan terms through a refinance. However, remember that there will be closing costs associated with refinancing, so it’s essential to weigh the potential benefits against the costs before deciding. Follow these Steps to get Low-cost Mortgage Refinance to lower your Interest rate and Monthly Payments.
Can I buy a home after declaring bankruptcy?
Of-course you can. It is possible to secure a mortgage after going through a bankruptcy. Yet, it’s important to note that there’s a waiting period involved. The duration of this waiting period varies, typically spanning from 12 months to four years. The specific length hinges on factors like the type of bankruptcy you filed for and the type of loan program you’re considering.
Can I get a loan after forfeiture or Repossession?
After a mortgage foreclosure, the waiting period before you can get a new mortgage depends on other credit issues. This period typically spans from two to seven years. However, if there were special circumstances, like a significant health problem or job loss impacting the primary earner of the household, there might be exceptions that allow you to obtain a loan sooner than the usual waiting period.
Helpful Mortgage Guide to help you choose:
- FHA Loan insured by the Federal Housing Administration
- VA Home Loan Buyer’s Guide, Program Benefits, Eligibility
- USDA Home Loan by United States Department of Agriculture
- Government-backed Mortgage Home Loan for First Time Buyers
- How to Calculate Debt-to-income Ratio for a Mortgage Application
