Home loans for bad credit

A credit score below 580 is usually considered bad or poor credit, based on the FICO credit scoring model. Some mortgage lenders require a credit score of at least 620 for their “bad credit” programs.

But even with a credit score in the 500s or low 600s, you still have options to consider. Some of the best home loan options to look into with less-than-ideal credit are government-backed loans, including FHA, VA, USDA and even conventional home loans.

7 home loan options for bad credit

While there’s no official minimum credit score for mortgages, you’ll need a credit score between 500 and 640 at least to qualify with most mortgage lenders.

Aside from credit scores, the down payment requirement is also worth heavy thought. If you choose a loan program that allows for a down payment of less than 20%, you’ll likely need to pay private mortgage insurance (PMI) premiums until your mortgage balance is 80% or less of the home’s market value. PMI can cost up to 1% of your loan amount each year, so it’s something to keep in mind.

With those two major factors in mind, here are seven loan options to consider with less-than-perfect credit.

1. FHA loans: 500 to 580

• Minimum credit score: 500 to 580
• Minimum down payment: 3.5% to 10%
• DTI ratio: Less than 31%, but varies

Backed by the Federal Housing Administration (FHA), these loans are popular with younger borrowers looking to get their first home — and it may be one of your best options as a bad credit home buyer. It’s also one of the only home loans you can use to finance a manufactured home.

FHA credit score and down payment requirements are low compared to other home loans. With a 3.5% down payment, you’ll need at least a 580 credit score. If you put down at least 10%, you only need a credit score of 500.

However, there are some unique stipulations with an FHA loan. Some include the required inspection by an FHA appraiser to ensure the home meets safety standards, and the typical requirement of paying mortgage insurance premiums (MIP) for at least 11 years or lifetime of the mortgage.

2. VA loans: 580 to 620

• Minimum credit score: 580 to 620
• Minimum down payment: None
• DTI ratio: Less than 41%

The United States Department of Veteran Affairs (VA) guarantees home loans for service members, veterans or surviving spouses of service members. The VA doesn’t have an official credit score requirement, but depending on the lender, you may need a credit score of around 580 to 620 to qualify.

One of the biggest benefits of a VA home loan is there’s no down payment requirement — a real advantage for first-time home buyers. And you won’t have to pay for mortgage insurance if you don’t put any money down because the VA backs the loan.

3. USDA loans: 580 to 640

• Minimum credit score: 580 to 640
• Minimum down payment: 3%
• Maximum DTI ratio: Less than 41% to 55%, depending on program

This option is a mortgage from the US Department of Agriculture (USDA), available to buyers in rural areas and those buying a primary residence. There are multiple USDA programs, such as the 502 Direct Loan program, which may offer rates as low as 1%.

Many USDA programs require a credit score of at least 640. If your credit score is lower than that but above 580, you may still qualify depending on what led to the lower credit score and the lender you’re working with.

4. Conventional loans: 620

• Minimum credit score: Typically 620
• Minimum down payment: 3% to 20%, depending on lender
• Maximum DTI ratio: Less than 36% to 43%, depending on lender

A conventional fixed-rate mortgage is one of the most popular options available and is offered by most home loan providers. At one point, conventional mortgages required a 20% down payment, and many lenders may still carry this requirement, but you may find a down payment required as low as 3%. But if you put down less than 20%, you’ll need to pay mortgage insurance.

Most lenders require a credit score of at least 620 for a conventional mortgage — but it varies. When comparing conventional mortgage lenders, requirements and rates vary quite a bit, so be sure to compare lenders thoroughly to get the best deal available to you.

5. HomeReady Mortgage: 620

• Minimum credit score: 620
• Minimum down payment: 3%
• Maximum DTI ratio: Less than 43%

This home loan is designed for borrowers without a large down payment in hand and allows up to 97% loan-to-value (LTV) loans — which means the minimum down payment amount is only 3%. If you make a down payment of less than 20%, you’ll still need to pay PMI. But if your down payment is less than 10%, you may be eligible for a lower premium.

To qualify, your income cannot exceed 80% of your area’s median income, according to the 2023 income guidelines set by Fannie Mae. Credit score requirements and other stipulations vary, depending on what type of home you’re purchasing and your lender. For example, if you’re buying a multifamily home, plan on needing at least a 680 credit score.

6. Home Possible Mortgage: None or 660

• Minimum credit score: None or 620
• Minimum down payment: 3% to 5%, depending on the option
• Maximum DTI ratio: Less than 43%

The Freddie Mac Home Possible loan is very similar to the Home Ready loan. It also has a down payment requirement of 3%, designed for lower-income borrowers with limited credit histories. Your income can’t exceed 80% of your area’s median income to qualify, and you’ll need a credit score of at least 660. A down payment of less than 20% means paying PMI premiums, but if your down payment is less than 10% you may be eligible for a lower premium.

While Home Possible is very similar to Home Ready, Home Possible also offers a borrowing option for borrowers with no credit history, and requires a 5% down payment.

7. First-time home buyer programs

States can offer first-time home buyer mortgage programs, which can include down payment and closing costs assistance. The names of first-time home buyer programs vary by state. Some examples: California’s CalHFA, Michigan’s MSHDA, New York’s SONYMA and Texas’ TDHCA.

There are also national first-time home buyer programs with FHA, USDA, Fannie Mae and Freddie Mac to consider.

Bethany's experience: How my poor credit score affected my first home loan

My husband and I set out to buy our first house in 2019. I had not focused on building my credit history throughout college, resulting in a less-than-ideal FICO credit score of 600. My husband had a great credit score in the high 700s, so we thought we were golden.

But we learned a hard lesson in home lending — the coborrower with the lowest credit score is what lenders use to meet credit score requirements. My 600 credit score wasn't making the cut for a conventional home loan.

We worked for months to increase my credit score, and we finally got our house in October 2020 — well over a year since we started the process. And with the pandemic, realtors required potential buyers to be prequalified to even view homes. Instead of enjoying the homebuying experience, we were extremely stressed.

So work on your credit before you start touring houses or talking to lenders. Review your credit reports, and look into credit-building loans or cards. Buying a home takes time, so while you're window shopping, work on your credit.

— Bethany Hickey, Writer, Banking and Loans.

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Do I need a 20% down payment?

No you don’t. Conventional mortgages used to require 20% down, but there are multiple home lending options available that don’t require such a hefty payment up front to qualify. And with the average home price right now, 20% down is a huge ask — especially for first-time home buyers.

In the last quarter of 2022, the average sales price of a home in the US was $535,800. That would mean you need at least $107,160 to meet a 20% down requirement — that’s a lot of cheddar.

But luckily, there are home loans that don’t require as much cash down. Here are smaller down payment requirements to plan for based on the average house price:

• 3% = $16,074
• 3.5% = $18,753
• 5% = $26,790
• 10% = $53,580

What about PMI?

And that’s the catch. While a down payment of less than 20% is very attractive, it also means paying PMI in most cases. Mortgage insurance could be anywhere from 0.5% to 5% of your loan amount, depending on your debt-to-income ratio, down payment, loan size and credit score. Mortgage insurance is added to your mortgage payment, which can substantially increase your house payment each month.

For most loan types, you’ll have to pay mortgage insurance until you’ve reached 20% equity, but there are other ways to get out of paying PMI.

Will a poor credit affect the cost of my mortgage?

Yes, having poor credit can mean having a higher-cost mortgage than someone with top-tier credit. In home loans, conventional mortgage lenders use a risk-based assessment called loan-level price adjustment (LLPA) program, established in 2008.

The LLPA adjusts your rates based on your credit score, loan-to-value ratio, the type of mortgage and other factors, according to the FDIC.

So if you have poor credit, lenders will charge you higher rates since they consider poor credit to be risky. However, having poor credit doesn’t automatically mean you’ll pay more in fees, mortgage insurance or other odds and ends. Those additional costs largely depend on the type of mortgage you’re getting.

How to get a mortgage with bad credit

A lower credit score can mean a bit of a struggle when it comes to getting competitive mortgage rates or getting approved for a home loan at all. The benchmark for many bad credit mortgage programs starts at 620, with a few options accepting lower scores.

On the plus side, here are some tactics you can use to counter the negative side effects of bad credit.

• Work on your credit. Before you even apply for any loans or try for prequalification, look for ways to improve your credit. Start by requesting your credit reports to find pain points, work on paying down debts and stay on top of your finances while you’re shopping for a new home.
• Consider an FHA loan. FHA loans tend to 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.
• Avoid taking on new debt. Your DTI ratio is a very important factor. Before applying for a mortgage, avoid taking on new debt or racking up credit cards to keep your DTI ratio low.
• Have a coborrower. A coborrower will have the same level of responsibility for the loan as you, unlike a cosigner. Your coborrower’s income and assets will also be considered in the home loan application. Often, coborrowers are spouses or life partners.
• Rate shop. If you apply with multiple lenders within two weeks, only hard pull impacts your credit score. Shop around, look up requirements before applying and get multiple quotes to find the best deal you can. Connection services, like LendingTree, may be helpful in comparing lending options quickly.
• Save for a down payment. The larger your down payment, the higher your chances of qualifying for a home loan. Most mortgage programs have down payment requirements, usually starting at 3% reaching up to 20%.
• Put 20% down. Seems like we just said this, but having 20% down is a big deal. Putting at least 20% down means not having to pay mortgage insurance, which can mean huge savings — all the more important if you aren’t eligible for the best rates due to poor credit.

Bottom line

There are multiple home loans available if your credit score isn’t perfect. In fact, poor credit may not be the biggest hurdle to overcome, since the down payment requirement can be much tougher for many buyers. And there are mortgage programs that offer 0% down home loans as well — or very close to it.

Keep comparing top mortgage lenders with our home buying guide.