Home Loans for Bad Credit: What Are Your Options?

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How to Buy a Home with Bad Credit

If your credit score is less-than-perfect and you’re hoping to buy a home, it’s important to do your research. Compare loans from different lenders, national and community banks, and credit unions, and consider talking to a financial counselor about the best type of loan for your situation. Here, we’ll explain the types of loans you may be able to get with a bad credit score.

What Type of Loan Can I Get with a Low Credit Score?

There are many types of loans you can apply for with a low credit score, including loans backed by the government and loans that are inclusive for low-income households with low or no credit history. 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 an FHA loan 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 the 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 minimum credit score requirements, 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 scenarios apply to you, you may want to reconsider applying for a home loan until you’re able to improve your credit score or your financial situation changes:

• If the mortgage will decrease your savings to practically zero
• If the payments will exceed more than 30% of your monthly income 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’ll quickly find out if you’re eligible for a loan through the lender’s mortgage application process. If you feel like the loan offered to you is a good fit, then congrats! But just because you’re 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.).

And if you decide that none of these loan types are right for you? Consider these Alternatives When You Can’t Buy a House with Bad Credit.

The Bottom Line about Buying a Home with Bad Credit

Buying a home with bad credit is possible, but it requires careful planning and research. Explore your options, compare loan programs, and work with lenders like Marine Credit Union that understand your unique situation. Before committing to a mortgage, make sure you’re financially ready—not just to qualify but to thrive as a homeowner. With the right preparation and guidance, you can achieve your dream of homeownership, even with less-than-perfect credit.