How to Get a Mortgage With Bad Credit

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Your credit history is one of the main factors a lender looks at when considering your mortgage application. Your credit score shows how reliable you are in paying what you owe back. While, having a good credit score makes it much easier for you to qualify for more types of loans and with probably better terms, don’t get discouraged if your credit score is not there yet. Most lenders look at credit scores jointly with other factors, which can qualify you for a bad credit mortgage.

What is Considered a Bad Credit Score?

The two biggest credit scoring companies, FICO and VantageScore Solutions, have different ranges of what they consider a poor credit score. For FICO, anything below 580 is a poor credit score, while VantageScore considers scores below 500 as “poor”. However, this does not mean that you will not be able to get a mortgage if your credit score is in these ranges, it mostly serves as a basis for you to compare where your score stands.

Lenders choose their own credit score requirements so there is no universal minimum credit score below which you cannot get a mortgage. This means that shopping around is worth it as different lenders have different requirements.

Can I Buy a House With Bad Credit?

Your credit history is not the only thing lenders look at when evaluating your mortgage application. Therefore it is possible to buy a house even when you have a bad credit history. To increase your chances of getting approved for a mortgage, you can consider improving other aspects of your borrower’s profile, such as:

Your down payment

If you have a low credit score and the amount you can borrow is not enough to purchase the house you are interested in, you can pay the difference in cash by putting more in down payment. A higher down payment may help offset the negative effect a low credit score has on your mortgage application, as it decreases the risk for the lenders in case that you default on your payments.

Your current outstanding debt

Having a lot of debt before applying for a mortgage, can lower your chances of being approved for one. Lenders are reluctant to give out mortgages to people who already have a lot of obligations that they need to pay back. Your debt will also affect your DTI ratio, making it bigger if you have a lot of debt. The chances are even lower when combining existing debt with bad credit. Therefore, to boost your chances of getting approved for a mortgage, make sure to pay down any existing debts beforehand.

Your income

Your income is a factor that affects your Debt-to-Income ratio. The DTI ratio shows how much of your current income goes towards making debt payments. For the same amount of debt payments, a higher income lowers the DTI ratio. Lenders tend to look for a DTI ratio of 36% or less.

Whether you will be approved for a mortgage or not, will depend on how you “score” on a combination of these factors together with your credit score. However, it is important to note that even if you do qualify for a bad credit mortgage, your monthly payments will probably be higher than usual, since a low credit score usually leads to a high mortgage rate.

Types of Loans to Get With Bad Credit

There are certain mortgage options that are designed to encourage homeownership among applicants with lower credit. If you are looking to get a mortgage with bad credit, you need to consider the following types of mortgages:

1. FHA Loan

   This is a type of non-conventional loan that is backed by the Federal Housing Administration under the Housing and Urban Development department of the U.S. government. FHA loans are recommended for low-income earners, people who haven’t built their credit score yet or have been bankrupt in the past.

   Since this type of loan is insured by the government, it is less risky for FHA-approved lenders to give them out. Thus, FHA loans have looser financial requirements, including a minimum credit score of 500 for a down payment of 10% and a minimum credit score of 580 for a down payment of 3.5%.

   However, the low credit score that FHA loans accept comes at a cost. If you put less than a 10% down payment, you will have to pay FHA mortgage insurance throughout the life of the loan. On the other hand, if you put less than 10% down, you are required to pay mortgage insurance for 11 years.

   Another appealing feature of FHA loans is that they don’t carry risk-based pricing. This means that applicants with low credit scores don’t necessarily get a higher interest rate than applicants with higher credit scores.

   Pros	Cons
   Low credit score requirements compared to other loans The minimum down payment is 3.5% for credit scores of at least 580 Does not carry risk-based pricing	Lifetime mortgage insurance if the down payment is lower than 10% or 11 years of MIP for a down payment of at least 10% Restricted to FHA-approved properties

2. VA Loan

   VA loans are backed by the Veterans Affairs department of the U.S. government. The only people eligible for this type of loan are service members, veterans, and their eligible spouses. VA loans have no minimum down payment and no minimum credit score requirement. However, most lenders look for a credit score of at least 620.

   VA loans don’t require borrowers to pay for mortgage insurance and just like FHA loans, they also do not carry risk-based pricing.

   Pros	Cons
   There is no minimum required down payment There is no minimum required credit score, however, most lenders look for 620 and above No mortgage insurance required After certain bankruptcies, VA loans have a 2-year waiting period Do not carry risk-based pricing	Only veterans, service members, and their spouses can qualify There is a VA funding fee of 1.4% to 3.6% of the loan value

3. USDA Loan

   These loans are backed by the U.S. Department of Agriculture with the purpose of encouraging homeownership in rural areas. Therefore, there are specific eligibility criteria to qualify for a USDA loan, such as the area being rural and your income being less than 15% of median household income in the area.

   You can get a USDA loan with a 0$ down payment and there are no credit score requirements. However, most lenders look for a credit score of at least 640.

   Pros	Cons
   There is no minimum down payment requirement There is no minimum required credit score but most lenders look for 640 and above Offer low fixed interest rates	Restricted to individuals living in rural areas with less than 20,000 people Your income should less than 15% of the median household income Lifetime mortgage insurance premiums

4. Conventional Loans

   Conventional loans usually require a minimum credit score of 620. Most conventional mortgages are administered by Freddie Mac and Fannie Mae, which charge for loan-level price adjustments.

   What are Loan Level Price Adjustments?

   Loan Level Price Adjustments are extra fees in conventional mortgages based on the risk characteristics of the borrower and the loan. The idea behind LLPAs is that riskier mortgages should be more expensive. Therefore, depending on your credit score, LTV ratio, DTI ratio, and other properties that determine your risk level, you may have to pay more because of LLPAs.

   This means that applicants with bad credit will be charged higher mortgage rates, which will increase their monthly payments. Therefore, even if you can qualify for a bad credit mortgage through a conventional loan, it will probably be more expensive than other loan options, such as an FHA loan.

   Pros	Cons
   Minimum down payment of 3% Mortgage insurance is removed once you get an LTV ratio of 78% No upfront program fees	Requires a credit score of 620 Stricter qualification requirements Carries risk-based pricing

5. Freddie Mac – Home Possible

   The Home Possible program by Freddie Mac is designed to make homeownership possible for first-time homebuyers, very low-to low-income earners, and borrowers wanting a low down payment. Apart from a minimum down payment of only 3%, the program comes with other low fees and low mortgage insurance requirements.

   Home Possible mortgages offer certain features that make them appealing to borrowers with a bad credit history:

   → You are allowed to use a non-occupant co-borrower to help you get approved for the mortgage. A non-occupant co-borrower is someone who does not live with you but will share the liability of repaying back the loan. Depending on their financial standing, such as their credit score and income, a co-borrower can increase your chances of getting approved for a mortgage, especially if your credit history is not favorable.

   → You can include other sources of nontraditional income when applying for a loan. For instance, besides your salary, you can also include monthly rental income to qualify for this mortgage, which increases your chances of approval and the amount you can qualify for.

   → The program also allows borrowers to fund their down payment through multiple sources, be this either gifts, funds from the government, employer-assisted homeownership programs, and Affordable Seconds.

   However, since the Home Possible program aims to help very low- to low-income earners qualify for a mortgage, applicants whose income is above 80% of the median area income are not eligible. Also, compared to other options available to applicants with bad credit, Home Possible requires a relatively highercredit score of at least 660.

   Pros	Cons
   Minimum down payment of 3% Allows using a co-borrower to help you get approved for the loan Allows using alternate sources of income to qualify Allows several sources of funding for the down payment No upfront mortgage insurance	Requires a credit score of 660 Applicants with income above 80% of the median average income are not eligible Loan limits depending on the county

6. Fannie Mae – HomeReady

   HomeReady is a loan program developed by Fannie Mae that offers mortgages with low down payments and fees for a moderate credit score.

   → HomeReady requires a down payment of only 3%, which can be funded through multiple sources such as gifts, grants, and Community Seconds, without any minimum requirement from personal funds for single-family homes. There is, however, a minimum borrower contribution of 3% for multiple-family homes.

   → Besides co-borrowers, HomeReady also accepts income from somenon-borrowers to be counted towards your mortgage application. For example, you may be allowed to include the income of relatives who will live in your home even if they are not listed on the mortgage and will not own the house. This is a great help to borrowers with bad credit when applying for a mortgage, because a higher income can increase your chances of being approved for a mortgage or can help you borrow a bigger amount.

   → The HomeReady program requires a minimum credit score of 620. However, there is a lot of flexibility in this requirement. For example, if you have a low credit score because you don’t have sufficient credit history or have not used your accounts enough, the HomeReady program will still consider your application, even if your score is less than the minimum required. Moreover, if your credit score is higher than 680, HomeReady may provide you with better mortgage terms.

   Just as in the Home Possible program, if your income is higher than 80% of median area income, you are not eligible for the program.

   Pros	Cons
   Down payment as low as 3% Allows using multiple sources to fund down payment Includes nontraditional sources of income More flexible in credit score requirement No upfront mortgage insurance	Minimum credit score requirement of 620 Applicants with income above 80% of the median average income are not eligible Loan limits depending on the county

7. Non-Qualified Mortgages

   Non-qualified mortgages are designed to help applicants who cannot meet the necessary criteria to be considered for a qualified mortgage, become homeowners. Qualifying mortgages follow certain rules set by the government to prevent giving out mortgages that present a high risk of default. Non-qualified mortgages do not need to follow these rules and hence are not backed by government agencies such as FHA, VA, USDA, Freddie Mac, or Fannie Mae.

   Non-qualified mortgages have looser and more flexible financial requirements, which allow borrowers with bad credit histories to get a mortgage. It also serves as a good alternative for self-employed borrowers who might not have a steady income flow. Another alternative to non-qualified mortgages is to borrow money from the seller. This is known as a seller carry back mortgage.

   Pros	Cons
   Looser financial requirements allowing borrowers with low credit scores to qualify Requires less income documentation Similar application process to qualifying mortgages	May come with higher interest rates and fees Fewer lenders offer them than qualifying mortgages

Best Mortgage Lenders for Bad Credit

If you are in your home buying process and are trying to get a mortgage while having a bad credit history, you might want to start your search with the following lenders:

Lender	Minimum Credit Score	Best known for:
	500	Poor credit loans
	580	Nontraditional evaluation of credit for some borrowers
	540	Low down payment loans
	550	Customer service
	580	VA Loans

What Affects My Credit Score?

To find out how to improve your credit score, it would be useful to first understand how your credit score is calculated. 5 factors of different weights contribute to one’s FICO credit score:

While it is possible to get a mortgage with bad credit, improving your credit score is worth it because not only will it give you more mortgage options, but you will also probably get better terms by having a higher credit score. So, before rushing into what is offered to you with your low credit score, take the time to evaluate if the offer is worth taking or if it would be better to wait until your credit has improved.

How to Boost Your Credit Score Fast?

Pay off your credit balances - Credit cards typically require users to make minimum payments towards the balance on their credit account. However, paying more than the minimum can help boost your credit score since you will be paying what you owe faster and will also contribute towards your credit utilization, which means that what you owe will be a smaller portion of your total credit limit. Making multiple payments every month can also help keep your balance low at all times. However, your credit score will increase the most when you pay off all of your credit balance.

Increase available credit - Increasing your credit limit can decrease your credit utilization which positively affects your credit score. You can increase your available credit either by asking the lender to increase the limit of your existing credit card or by opening a new credit account. However, opening new accounts can have an adverse effect on your credit score, because the lender will do a hard inquiry on your credit which lowers your credit score. So, before applying for a new credit card, make sure to do your research on the lenders’ requirements.

Check for errors on your credit report - While most people choose to not go through the specifics of what causes their low credit score, it is not uncommon for there to be errors made by the three credit bureaus - Equifax, Transunion, and Experian or your creditors. Therefore, it is important for you to know and to review carefully what is included in your credit report. This way, you can dispute with them any inaccuracies which might have caused your credit score to drop. You can check your credit report for free at AnnualCreditReport.com.

Remove any paid-off collections - Collections on your credit report show the lender that you owe money to other people. This item negatively impacts your credit score. Therefore you should pay off any collections and ask them to remove the item from your credit report. Because paid-off collections on your report can still affect your credit score negatively, it is crucial that you try to delete the paid collections altogether.

Bad Credit Mortgage FAQ

Should I refinance my bad credit mortgage?

If your credit score has improved since the time you got your bad credit mortgage, then refinancing can help you get better mortgage terms such as a lower interest rate and lower mortgage insurance payments. However, before refinancing, make sure that the new terms are worth paying the refinance closing costs for.

Will I pay more in closing costs with a bad credit mortgage?

Not necessarily. Closing costs depend on the type of mortgage you get, the home price, and several other factors. However, with a bad credit history, your loan options are limited which can lead to higher closing costs. For example, a lender might not be willing to offer you the same type of loan that they offer to someone with a better credit score and that type of loan might end up having lower closing fees, which you cannot take advantage of.

Should I get a cosigner for my bad credit mortgage?

A cosigner can help you get approved for a mortgage if they are in good financial standing. Their income will be counted towards eligibility requirements such as the DTI ratio. However, a co-signer will be on the hook if you fail to make your monthly payments since they will also be responsible for any late payments, making their creditworthiness decline.

Will I pay higher insurance premiums with a bad credit mortgage?

This depends on the type of mortgage you get. With conventional loans, yes, if you have a low credit score, you will probably end up having higher private mortgage insurancepremiums since you will pose a bigger risk to the lender.

With FHA loans, bad credit won’t necessarily have an impact on how much you pay in mortgage insurance. However, it will affect the down payment that you are required to make, which in turn affects the mortgage insurance. For example, if you have a credit score of at least 580, you are required to make a minimum down payment of 3.5%. A down payment of less than 10% requires the borrower to pay mortgage insurance premiums throughout the life of the loan.

Can I buy a house after bankruptcy?

Yes, you can buy a house after filing for bankruptcy. However, you will probably have to wait for 2 to 4 years first. How long you wait is decided by the type of bankruptcy you file (Chapter 7 vs Chapter 13) and the type of loan program you apply for.

Can I buy a house after foreclosure?

Yes, but you will have to wait a period of time before being able to get a mortgage. FHA requires a minimum wait period of 3 years, VA requires 2 years, while Freddie Mac and Fannie Mae require a minimum waiting period of 7 years.