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Home loans for bad credit
A good mortgage may still be available for low credit score borrowers.
Updated . What changed?
A bankruptcy you filed a few years ago, medical bills you couldn’t afford, or even just a handful of late student loan payments can come back to haunt you when it’s time to buy a home. While bad credit makes applying for a mortgage a little trickier, it doesn’t have to make it impossible.
What's in this guide?
- Can I get approved for a mortgage with bad credit?
- How to get a mortgage with bad credit
- What's the minimum credit score to get a home loan?
- Should I take out a mortgage with bad credit?
- Mortgage alternatives for low credit scores
- Ways you can end up with bad credit
- Bottom line
- Frequently asked questions
Can I get approved for a mortgage with bad credit?
Yes, but you’ll need to show some financial strength in other areas — for instance, a strong work history and enough funds to make a down payment. If your credit score is low, start by researching FHA loans, which generally have more lenient guidelines than conventional loans. You could also search for any federal and state programs that assist borrowers with low credit scores.
How to get a mortgage with bad credit
There are several steps you can take to better your chances of securing a home loan if your credit is less than stellar.
- Don’t apply for too many loans at once. Your credit file contains all previous inquiries for credit, including past loan applications. Too many inquiries in the same space of time can present another red flag to lenders by signaling possible money management problems.
- Be honest with your lender. Non-conforming lenders will look at the red flags in your credit history and ask for detailed explanations of each entry. If you try to hide something, you won’t improve your credit rating. You’ll simply make the lender more suspicious.
- Pay your rent on time. Your rental history could make a difference, but it’s often not included in your credit report. If you can verify you’ve paid your rent on time for 12 to 24 months, make sure your lender knows.
- Make a larger down payment. A larger down payment makes you look less risky and might convince a lender to work with you even if you have bad credit. If you can’t come up with much, you may qualify for down payment assistance programs that help you find credits or grants to offset the expense.
- Avoid applying with a spouse who has bad credit. If your partner is the one with bad credit, sometimes you can avoid rejection and the higher interest rates of a bad credit loan by applying as a single applicant. Note that this may reduce your borrowing power since your partner’s assets won’t be counted.
- Find a cosigner. Consider asking a friend or family member to co-sign the loan with you. But know that if you default, they’re responsible for the entire debt along with you. And any missed or late payments you make could affect their credit as well.
- Shop around. Just because you have bad credit doesn’t mean you should take any loan you’re offered. Doing your research could get you better terms and save you thousands in fees and interest.
What’s the minimum credit score to get a home loan?
When getting a mortgage, your credit score is an essential part of the decision-making process for lenders, if not the most important. Typically, credit scores range from 300 to 850, and lenders look for scores of 700 or above. You can find lenders that provide mortgages to borrowers with scores below 700, but your rate and terms won’t be favorable.
The type of mortgage you’re applying for will also affect the minimum credit score requirements. For instance, if you’re applying for an FHA loan, you’ll need a score of at least 500 to be eligible. And to qualify for the lower 3.5% down payment, you’ll need a score of at least 580.
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Should I take out a mortgage with bad credit?
Even if you do find a lender willing to work with you, taking out a mortgage when you have bad credit might not be the right choice for you. Consider the following drawbacks before you sign on the dotted line.
- High interest rate. You’ll most likely have to pay an extremely high interest rate. Waiting to improve your credit could save you thousands over the life of your loan.
- Private mortgage insurance (PMI). If you decide to use an FHA loan or are unable to come up with a 20% down payment, you’ll be stuck paying the extra expense of PMI.
- House poor. With all the added interest and fees, your mortgage payment could end up being more than the recommended 30% of your income, which may leave you without the money you need to pay other bills or even risk foreclosure.
- Added home expenses. Buying a house means no longer having a landlord to take care of emergency or surprise repairs that are needed. If you don’t have an emergency fund ready, a fallen branch or plumbing emergency may be financially devastating.
Mortgage alternatives for low credit scores
If you’re having trouble getting a mortgage because of bad credit, you do have options. Consider these:
- Improve your credit. Taking out a loan with a poor rate and terms isn’t always advisable. Take the time to improve your credit score and purchase a home in the future.
- Larger down payment. The larger your down payment, the better your chances of getting a mortgage.
- Cosigner. If you have someone with good credit who is willing to cosign on your mortgage, you might qualify. Make sure both of you are aware of the risks and implications before moving forward.
Ways you can end up with bad credit
There are a number of factors that can lead to strikes on your credit history. You may find your credit history damaged if you:
- Have unpaid bills. This is one of the leading causes of bad credit scores.
- Have been late on payments. Late payments will also affect your credit history, but they will not have as much of an impact as unpaid bills.
- Have been declined for a loan. If you’ve recently been declined for a mortgage or other major loan, this will be recorded on your credit file. Many lenders may see this as a sign of impaired credit.
- Have applied for credit too often. It’s a general rule of thumb that you should only apply for one new line of credit once every six months. Any more than this could raise a red flag to lenders.
- Have declared bankruptcy. If you’ve declared bankruptcy, it will stay on your credit rating for seven years.
How to improve your credit score
If you’ve explored all of your options and still can’t get a mortgage, there are steps you can take to improve your credit. Here are the top three ways to improve your credit:
- Check your report for any mistakes or errors.
- Pay off debt so your utilization rate is below 30%.
- Make payments on time — always.
Buying a new home can be exciting and life-changing, but also stressful if you have bad credit. But a bad credit score doesn’t have to be the end of your new-home dreams. If you spend some time working on improving your credit score and find a lender who’s willing to listen to your side of the story, it’s still possible to find a mortgage that works for you.
Frequently asked questions
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