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How to Get a Mortgage With Bad Credit

Bad credit doesn’t mean you won’t be able to get approved for a mortgage, but you’re going to pay much more in interest.

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It’s a challenging time to buy a home right now. Prices remain stubbornly high while inventory remains stubbornly low. What’s more, mortgage rates aren’t showing any signs of drifting below 6% anytime soon. While some prospective homebuyers with great credit face challenges when home hunting, It’s even more challenging if you have bad credit, generally with a FICO score of less than 620. Sure, it’s possible to get a mortgage with less than favorable credit, but it’ll cost you. 

If you’re looking to buy but with below average credit, read on to understand key considerations to keep in mind when qualifying for a mortgage.

Can you buy a home with bad credit?

Short answer: Yes. There are plenty of ways to buy a home if your credit is less than good, but it won’t be as easy -- or as cheap -- as it is for someone who has a good to exceptional credit score. The best way to become a homeowner with bad credit is to have a good chunk of cash for a down payment. Mortgage lenders like to see some skin in the game from any borrower, but that’s even more true with someone who seems like a higher risk of default. 

If you have bad credit, be prepared for a longer search to find the right lender, too. Most banks and credit unions aren’t looking to add risky loans to their books. Your search is going to feel more like combing through every clearance aisle at the department store to find a shirt that fits instead of simply picking up the first shirt you see. Simply put, be ready to do the work.

What’s considered a low credit score among lenders?

There isn’t an automatic threshold that puts you in “bad credit” territory. However, 620 is a critical number to keep in mind. That’s the minimum score you’ll need to qualify for most conventional loans. By conventional, we mean non-government-backed mortgages. FHA ,VA and USDA loans generally accept borrowers with lower scores, although lenders that offer these loans will set their own standards.

What will a low credit score cost you?

The lower your credit score, the higher your costs of home ownership. While credit scores can look different based on the kind of score your lender uses, the FICO score is most often used, and the myFICO calculator offers a simple look at how a few points can make a big impact on your payments. Consider this breakdown of a 30-year fixed-rate home loan for $300,000:

FICO scoreAPRMonthly paymentTotal interest over the life of the loan
766–8506.455%$1,887$379,440
700–7596.677%$1,931$395,253
680–6996.854%$1,967$407,968
660–6797.068%$2,010$423,466
640–6597.498%$2,097$455,004
620–6398.044%$2,211$495,781
*Rates and calculations reflect the market on June 16, 2023. SOURCE: FICO

While a 0.21% difference on an APR might not sound like much, it ultimately has a huge impact on your budget. For example, a borrower with a credit score of 675, taking the time to boost that score by as little as five points, can save $43 per month and more than $15,000 over the next 30 years.

Types of mortgages with low credit score requirements

If your credit score is lower than 620, you still have options. Here’s a rundown of home loans that are designed to accommodate a low credit score. Remember, requirements vary from lender to lender. And just because they offer these loans doesn’t mean they’ll approve your application.

FHA loan: Guaranteed by the Federal Housing Administration, these loans are available to borrowers with credit scores as low as 500. There’s a catch, though: If your score is between 500 and 579, you’ll need a down payment of at least 10% of the purchase price. If your score is 580 or greater, you only need a down payment of 3.5% of the purchase price.

VA loan: If you’re a qualifying service member or veteran, you may be eligible for a home loan backed by the US Department of Veterans Affairs. The VA doesn’t have a minimum credit score, and many lenders will accept lower credit scores. Another benefit of these loans is that rates tend to be lower than all other mortgages.

USDA loan: If you’re looking for a home in a qualifying “rural” area, you may be able to receive a loan backed by the US Department of Agriculture. Again, there are no minimum credit score requirements, but lenders set their own standards. Don’t be surprised, however, if you need a credit score of 640 in some cases.

Non-conforming loan: This is a type of loan that doesn’t conform to conventional loan standards. Look for lenders that specialize in helping customers with unique circumstances. For example, your credit score might be low due to a lack of credit or if you’re recovering from a major past financial challenge such as a bankruptcy. 

How to get a mortgage with a low credit score

Getting a mortgage with a low credit score will come with some high costs. However, if you’re firmly committed to the idea of owning a home instead of renting one, you should consider the following steps to find the best deal possible.

Research all your options: While mortgages for bad credit aren’t common, there are lenders that offer them. Each of those lenders will have different fees and rates, so shop around.

Consider credit unions, community banks and portfolio lenders: Your search shouldn’t stick to the most-recognizable banks and home lenders. Instead, cast a wide net that includes smaller institutions. Portfolio lenders, for example, are institutions that don’t sell their loans on the secondary market or to government-sponsored entities such as Fannie Mae and Freddie Mac, which means they can often afford to take bigger risks with bad credit borrowers.

Find a co-signer: If you have a close friend or family member who can co-sign on your loan, you may be able to benefit from their more established credit history. However, this can be tricky. The lender will still look at your credit score, and you’ll run the risk of ruining your personal relationship if you struggle to make your payments on time.

Look for down payment assistance options: Bad credit doesn’t necessarily mean you’ve done anything wrong in the past. You might be young with limited credit history, or be starting out with a lower salary than you’d like. That can put you in position for a number of programs that can help you cover a down payment and closing costs. 

Save more money: Speaking of down payments, you’ll be in better shape if you have the ability to make a large upfront contribution to your purchase. For example, some lenders will approve an FHA loan application for borrowers with credit scores as low as 500 if they can put down 10% upfront.

Nothing is guaranteed: If you see a promotion with a guarantee of approval, you’re better off looking elsewhere. Loan applications are never guaranteed, even if the institution is legit and reputable. 

Ways to boost your credit score to get a good rate on a mortgage

Ultimately, getting a mortgage when you have bad credit isn’t going to be great for your finances. You’re better off trying to leap from the “bad” bucket into fair or good territory. It won’t happen overnight, but there are ways to work to improve your credit score before you start house hunting.

Review your credit report: If your score is lower than desired, it might not be all your fault. Credit reporting agencies make mistakes, so get a copy of your credit report at AnnualCreditReport.com and dispute any errors you find.

Pay off your credit cards: Your credit score includes two types of debt: installment loans, such as student and auto loans with a fixed payment amount, and revolving loans with variable payments such as credit cards. It’s crucial to keep your revolving debt in check. If you have a large amount of credit card debt, you’ll want to pay it off before you apply for a mortgage. Doing so improves your credit score and your debt-to-income ratio at the same time. It’s a win-win.

Stay on time with all your payments: Never miss a payment. This rule applies throughout every day of your life -- not just when you’re trying to get a mortgage. Lenders want to know that they can trust you to submit your payments on time every month. 

Look for credit-boosting opportunities: In recent years, companies have launched alternatives to help individuals with average credit boost their scores by sharing more information about their finances. For example, UltraFICO and Experian Boost are two options that will look at other behaviors to help improve your score, such as paying rent on time or a history of responsible banking habits.

Ask for a rapid rescore: Because credit scores can take a while to reflect changes, such as paying off a credit card or student loan balance or fixing an error on your credit report, consider asking for a rapid rescore. Rather than waiting for another month or two to see how your score changes, a rapid rescore might take less than five days to spit out a better score.

The bottom line

It’s possible to get a mortgage with bad credit, but that doesn’t mean you should. Instead, it’s important to recognize that you’ll save some money -- potentially a lot of it -- if you make an effort to improve your credit score before submitting your application. The current housing market can be frustratingly unaffordable for borrowers with very good to exceptional credit, so buying a house is going to look even more unattractive if your score is less than 620.

FAQs

Mortgage rates are quite high right now, even for someone with excellent credit. So, if you don’t have much saved for a down payment, you may be better off trimming your expenses and focusing on saving more money so you can borrow less when you’re ready to buy.

Making a large payment on an outstanding balance on a credit card can have an immediate impact on your credit score. You’ll improve your credit utilization ratio, which is one of the key factors that impacts your credit score. However, it can take some time for that payment to actually show up on your credit history. To accelerate the process, you can ask your lender to request a rapid rescore, which will likely come with a fee.

It depends on how low your score is, but you’re likely better off renting for now and setting a goal to boost your score over the next year. Your monthly rent payment won’t be impacted by your score, but your monthly mortgage payment will be. Ultimately, you need to do the math based on your local housing market to determine how much you’ll pay in rent versus how much your mortgage payment will be based on your low credit score.

If you recently made a large payment to reduce some of your debt, or if you’ve successfully initiated a dispute to fix a negative mark on your credit report, it’s wise to ask for a rapid rescore.

David McMillin writes about credit cards, mortgages, banking, taxes and travel. Based in Chicago, he writes with one objective in mind: Help readers figure out how to save more and stress less. He is also a musician, which means he has spent a lot of time worrying about money. He applies the lessons he's learned from that financial balancing act to offer practical advice for personal spending decisions.
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