Bad Credit Home Loans

Author Chandler Sullivan
April 22, 2022 | 10 Min. Read

Revised By Jennifer Tucker
December 16, 2022

Can I get a home loan with bad credit?

Buying a house is one of the biggest financial decisions many people make in their lifetime. Whether you’re a first-time home buyer or have purchased a home before, it can be an intimidating process with a lot of unanswered questions—especially if you’re looking for a bad credit home loan.

But having a low or bad credit score shouldn’t dash your dreams of homeownership. It is possible to get a home loan with bad credit. We’ll help you understand:

  • What your credit score means
  • Why your credit score is important when getting a home loan
  • How to get a mortgage with low or bad credit
  • The type of mortgage you might be able to get with a low credit score

What does my credit score mean?

One of the most important things to consider when buying a house and applying for a loan is your credit score. Your credit score is what lenders use to determine the likelihood you will repay a loan or credit card bill. Scores range from 300 to 850. There is a lot to know about credit, and you should fully understand your credit score before you move forward with applying for a mortgage loan.

What is a bad credit score?

The FICO score model considers scores of 580 and below as “low” or “bad.” Although the definition of a bad score will vary by lender, your FICO score is a good gauge to determine where you stand.

Buying a home with bad credit

Regardless of your credit score, there are many factors to consider when you’re applying for a home loan:

Bad Credit Home Loan: Frequently Asked Questions

What is the lowest credit score to buy a house?

The lowest credit score to get a loan depends on the lender and the type of loan. On average, the lowest scores most mortgage lenders consider range from 600 to 620.

Can I get a mortgage with a 500 credit score?

Yes, you can buy a house with a 500 credit score. However, it will take time to find the right lender and mortgage to fit your situation.

What is the easiest mortgage to qualify for?

Loans backed by the government may be the easiest way to qualify for a loan when your credit score is between 500-640. These types of loans include:

  • FHA loans, which require a credit score of 500 with 10% down or 580 with 3.5% down
  • VA loans, which typically require a credit score of 580-620
  • USDA loans, which typically require a minimum credit score of 640

How much house can I afford with bad credit?

How much house you can afford depends on your debt-to-income ratio, which is the percentage of your gross income used to cover your mortgage and other debt payments.

When considering how much house you can afford, don’t forget to factor in things like property taxes, mortgage insurance, and homeowners’ insurance. Having an escrow account can be a helpful way to save for these expenses.

You can also check out this mortgage payment calculator to get an estimate of what your monthly payments might be.

Can I buy a house with no money down and no closing costs?

VA loans or USDA loans may be an option when you are looking for a $0 down payment, but you should always be aware of closing costs which are difficult to avoid.

What are the drawbacks of a low-credit home loan?

If you have low or bad credit, avoid getting a loan that might be difficult to pay. Closing on the wrong mortgage rate could put you in a bad financial position.

The Consumer Financial Protection Bureau warns that low-credit mortgage loans can come with high-interest rates, putting borrowers at risk of defaulting on the loan. This can leave people in a worse financial standing than before.

What mortgage lenders work with a low credit score?

This Lender Search List from the U.S. Department of Housing and Urban Development can help you find lenders offering mortgage rates with good terms for bad credit. Marine Credit Union’s knowledgeable mortgage loan officers are also here to help.

How to buy a home with bad credit

It’s important to do your research and talk to a financial counselor about the best loan for your situation. Compare loans from different lenders, national and community banks, and credit unions. For example, FHA loans are typically easier to qualify for than other home loans.

What type of loan can I get with a low credit score?

Let’s look at the different types of loans that might fit your financial situation.

How do FHA Loans work?

Credit score: 500 with 10% down or 580 with 3.5% down.
Backed by the Federal Housing Administration, FHA mortgage loans have one of the lowest credit requirements. An FHA loan is attractive for first-time home buyers because FHA-backed loans don’t immediately require higher interest rates for bad credit. There are additional qualifications for FHA loans. For example, you can only use it for your primary residence and put the minimum percentage down.

How do VA Loans work?

Credit score: typically 580-620.
You could qualify for a VA loan if you are a veteran, service member, eligible spouse, or military affiliate. Backed by the Department of Veterans Affairs, this loan allows for purchasing a home with $0 down. Like FHA loans, there are specific qualifications to meet, and they vary by lender. A funding fee will be imposed as a one-time payment, as well. VA loans often have the lowest interest rates but offer similar treatment to low-score applicants as FHA loans.

How do USDA Loans work?

Credit score: minimum typically 640.
Backed by the U.S. Department of Agriculture, these loans allow you to buy a home with $0 down and low rates. Although these loans are primarily qualified for rural housing areas, they can also be available to buyers in suburban neighborhoods. USDA loans are specifically for low-to-moderate-income households and enforce strict income limits for applicants. This ensures these loans help applicants who truly need below-market rates and cheaper mortgage rate fees.

How do Conventional Loans work?

Credit score: minimum typically 620.
Non-government conventional mortgage loans are a little riskier. Aimed at people with moderate to good credit, they tend to charge higher interest rates and fees for people with lower scores. Fannie Mae and Freddie Mac are the top administrators for conventional loans. In general, if your credit score is below 600, it may be best to consider a different loan to avoid higher fees.

How do WHEDA Loans work?

Credit score: minimum typically 620.
The mission of the Wisconsin Housing and Economic Development Authority (WHEDA) is to provide affordable housing and business financial products. They aim to help moderate-to-low-income households achieve their dream of homeownership with two first mortgage programs and two down payment assistance programs.

How do Single Family Direct Loans work?  

Credit score: no minimum
Backed by the U.S. Department of Agriculture’s Rural Housing Service, these Loans (also known as Direct Loans) are for low and very low-income households. This program helps applicants by providing payment assistance that reduces mortgage payments. When it comes to their minimum credit score requirement, there is no strict cut-off. Applicants must be unable to obtain a loan from other sources to apply. People with a credit score of 640 are typically streamlined for review, while those with limited credit history are required to develop a credit history from two non-traditional sources, such as rent payments or utility records. This makes direct loans one of the most inclusive programs when it comes to home loan financing.

*Keep in mind that each lender has its own requirements that may vary, as well as potentially higher minimum credit scores. Check eligibility requirements for each loan.

Is it worth it to get a mortgage with bad credit?

If any of these situations apply to you, you may want to reconsider applying for a home loan until you have different financial responsibilities:

  • If the mortgage will decrease your savings to practically zero.
  • If the payments will exceed more than 30% of your monthly income that you cannot budget around.
  • If your credit score is low because of a large debt.
  • If you currently have trouble paying bills or providing necessities.
  • If you’re only approved for a mortgage with high-interest rates.

You will quickly find out if you’re eligible for any loan through the lender’s mortgage application process. If you feel like this is the best option for you, then congrats! But just because you are approved for a loan doesn’t mean you should take it. In addition to considering your mortgage rate and fees, you need a down payment, money for closing costs, and savings for emergencies (a tree falls, flooding occurs, house fire, etc.).

Alternatives when you can’t buy a house with bad credit

  • Improve your credit score. If your credit score is lower than 500 or you’re worried about being able to make mortgage payments, it’s best to improve your credit score before buying a home.
  • Consider a co-signer. A co-signer is usually a family member who legally agrees to help you with loan payments in case you cannot make payments. Not all loans allow co-signers, so it is important to ask specifically about co-signing agreements.
  • What about a personal loan? Lenders don’t easily allow personal loans to be used for any payments in the mortgage process. Using a personal loan for real estate won’t have the same tax advantages, and personal loans tend to have higher APRs and interest rates, meaning you will end up paying a lot more over time.

How can you improve your credit score before applying for a home loan? Here are some tips:

  • Pay off your current debts
  • Improve payment history by paying on time when you can
  • Lower your credit usage to 30% or less (e.g., never owe more than $300 on a $1000 limit credit card)
  • Don’t apply for new credit if you have opened a new account in the past three years

You can read more about understanding credit and how to improve credit reports here.

At Marine Credit Union, we believe financial education and homeownership create opportunities for personal stability and community growth. Finding HOME is a free program offered to anyone who wants the opportunity to own a home and achieve financial security.

The Finding HOME program is offered through the Marine Credit Union Foundation and provides free financial education to individuals and families who may have trouble with homeownership. Upon successful graduation from the program, Finding HOME guarantees access to a market-rate mortgage that fits your budget.

Check out Finding HOME to see if it would be right for you, or check out other state and local programs that can help.

Finding Home

What’s the bottom line?

Buying a home, especially with bad credit, can be an uncertain process—but it isn’t impossible. If you have bad credit and want to buy a home, don’t be discouraged from seeking advice on what is best for your current situation.

There are many types of loans you can apply for, but make sure they fit your financial situation. Loans backed by the government—like FHA loans, VA loans, and USDA loans—may be the easiest way to qualify for a loan when your credit score is between 500-640. Additionally, Single Family Direct Loans are inclusive for low- to very low-income households with low or no credit history. Just make sure to check out the additional requirements for each loan.

Having bad credit doesn’t mean you can’t own a home, but it may mean you should improve your score before applying for a home loan. Although it will take time to increase your credit score, it will benefit you beyond buying a house. Lowering your current debt, making on-time payments, and cutting down your credit usage to 30% or less will increase your credit score a little each month.

Learn More About Home Loans/Credit