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Home loans for bad credit

Don’t let a low credit score come between you and your dream of homeownership.

Buying a house can be a solid investment. And even if you have bad credit, several home loan options are still available to you. Learn about the types of mortgage loans you may qualify for and how you can work around bad credit.

Can I get a mortgage with bad credit?

Yes. You can find lenders willing to underwrite loans for borrowers with poor credit. The minimum score you need depends on the loan type and factors like your current income, down payment and cash reserves.

Mortgage lenders typically rely on your FICO credit score or a combination of your TransUnion, Equifax and Experian credit scores to determine the interest rate you’re eligible for. FICO scores fall into four categories:

Poor300–579
Fair580–669
Good670–739
Very good740 and higher

A credit score of 740 or higher typically results in the lowest interest rates on conventional loans, while scores of 500 and above may be acceptable for FHA, VA and other types of loans.

Home loan options for bad credit

For borrowers with lower credit, your best options will come in the form of government-backed loans, including FHA, VA and USDA loans. You could also look into a conventional loan or a Fannie Mae HomeReady or Freddie Mac Home Possible mortgage, which typically require a 620 credit score and a smaller down payment than other loan types.

Here are the typical minimum credit scores required by loan type.

  • FHA loans: 500 to 580
  • VA loans: 580 to 620
  • USDA loans: 640
  • Conventional loans: 620
  • HomeReady Mortgage: 620
  • Home Possible Mortgage: 620
  • Special state programs: Scores vary by program

How to get a mortgage with bad credit

Low-credit borrowers can follow a basic roadmap to getting a mortgage:

  1. Look into FHA loans, which have the most lenient guidelines of all types of home loans. If you or your spouse has a history of military service, VA loans can also be a good option.
  2. Research lenders and find out the types of federal and state mortgage programs available. These programs often have more lenient lending guidelines.
  3. Shop around and get multiple quotes — at least three or four — and talk to different lenders to see what they can offer.

Remember every lender is unique, and certain loan officers may have more experience helping low credit applicants. Be honest and explain any circumstances that may have contributed to your bad credit. If your score is in the low 500s, you’ll likely need to show financial strength, such as a strong work history, cash reserves or a cosigner.

Pros and cons of taking out a mortgage with bad credit

Before taking out a home loan with bad credit, consider the following drawbacks and advantages.

Pros

  • Can improve your credit. Buying a home and making regular, on-time payments can help boost your credit score over time.
  • A chance to build up equity. Buying a home provides an opportunity to build equity and increase your net worth.
  • Creates good financial habits. Due to the increased responsibility, homeownership can be an incentive to focus on your financial goals.

Cons

  • Higher interest rates. You’ll likely pay a higher interest rate than someone with good credit. If it’s an option, waiting until your credit improves could save you thousands in interest.
  • Higher lender fees. If you have bad credit, your lender may charge higher fees and closing costs to compensate for the higher risk they are taking on.
  • Refinancing costs. If you get a loan now and refinance later when your credit has improved, it could cost you thousands in fees.
  • Budgeting challenges. With the added interest and fees, your mortgage payment could end up being more than the recommended 30% of your income
  • Required cash reserves. Your lender may want to see enough cash on-hand to cover maintenance and other expenses that come with homeownership.

Understanding your options and any tradeoffs can help you make the best decision for your lifestyle and budget.

How to work around a low credit score

If you want to move forward with a mortgage but are having difficulty because of bad credit, look to options that can show your lender you’re not a risk to take on.

  • Get a cosigner. If you can’t qualify for a mortgage on your own, look to a loved one with good credit who’s willing to cosign on your loan — but make sure you both know the risks.
  • Drop a bad-credit partner. You may have better chances of approval as a single applicant if your partner has poor credit. But you’ll also lose the borrowing power of your partner’s assets, which won’t be considered by your lender.
  • Put more money down. If you’re in a position to make a larger down payment, it shows a lower risk to some lenders, giving you a better chance of qualifying for a mortgage.

How to improve your credit score before applying

If you plan to buy a home within the next year, start with four steps to improve your credit score:

  1. Check your credit report. Request a free copy of your report and report to the credit bureaus any inaccurate or incorrect information, which can adversely affect your chances of loan approval.
  2. Keep your credit balances low. Don’t carry credit card balances that represent more than 30% of your limit. That means if your limit is $1,000, keep your balance to $300 max.
  3. Pay your bills on time. Reinforce a responsible payment history by avoiding late fees and black marks.
  4. Avoid hard credit pulls. Too many hard pulls of your credit can pull down your score. Apply only for credit cards and financing that you need in the months leading up to your application.

Bottom line

Poor credit doesn’t have to come between you and your homeownership dreams. By comparing mortgage lenders and loan programs and understanding your options, it’s possible to find a loan that fits your budget and goals.

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