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With certain loan programs and lenders, it might be possible to obtain a mortgage despite having bad credit, particularly if you are able to make a sizable down payment, demonstrate significant cash reserves, and have a low debt-to-income ratio.
Approximately 2015% of American consumers have credit scores in the 500% to 20599% range on an 850-point scale, which is regarded as fair to poor credit by FICO. Another 10% are in the 600 to 649 range, which is considered fair credit. If your credit score is below average, you’re not alone. A good lender can assist you in obtaining a mortgage or provide guidance on how to be approved in the future.
Key takeaways:
- You can get a mortgage with a credit score as low as 620, 580 or even 500, depending on the type of loan.
- Some mortgage lenders offer bad credit loans with more flexible qualifying requirements but higher costs.
- It’s important to shop around for the best mortgage rates and terms, regardless of your credit score.
- Improving your credit score before applying for a mortgage can save you money on interest rates and closing costs.
So you’re wondering if you can get a mortgage with bad credit? The short answer is yes but it’s not going to be easy. Lenders are more likely to approve borrowers with good credit scores, so you’ll need to be prepared to make a larger down payment, pay a higher interest rate, or both.
Here’s what you need to know about getting a mortgage with bad credit:
What is considered bad credit?
A credit score of 620 or below is generally considered bad credit. The precise credit score requirements for a mortgage, however, will change based on the kind of loan you’re looking for.
What are the different types of mortgages available to borrowers with bad credit?
There are a few different types of mortgages available to borrowers with bad credit, including:
- FHA loans: FHA loans are government-backed loans that are available to borrowers with credit scores as low as 500. However, you’ll need to make a down payment of at least 10% to qualify for an FHA loan.
- VA loans: VA loans are available to eligible military service members, veterans, and surviving spouses. There is no minimum credit score requirement for VA loans.
- USDA loans: USDA loans are available to low- to moderate-income borrowers who want to buy a home in a rural area. There is no minimum credit score requirement for USDA loans.
- Non-QM loans: Non-QM loans are mortgages that are not eligible for purchase by Fannie Mae or Freddie Mac. These loans are typically available to borrowers with credit scores below 620, but they may come with higher interest rates and fees.
What can you do to improve your chances of getting a mortgage with bad credit?
There are a few things you can do to improve your chances of getting a mortgage with bad credit, including:
- Make a larger down payment: The larger your down payment, the less risky you are to the lender. This can help you qualify for a lower interest rate and better terms.
- Improve your credit score: You can improve your credit score by paying your bills on time, keeping your credit card balances low, and disputing any errors on your credit report.
- Shop around for the best mortgage rates: It’s important to shop around for the best mortgage rates and terms, regardless of your credit score. This will help you ensure that you’re getting the best deal possible.
It is possible to obtain a mortgage with poor credit, but you will need to be willing to make some sacrifices. You can raise your chances of being approved for a loan by increasing your down payment, raising your credit score, and comparing mortgage rates.
Frequently Asked Questions
Q: What is the minimum credit score needed to get a mortgage?
A: Depending on the kind of loan you’re applying for, different minimum credit scores are required to obtain a mortgage. For instance, you can obtain an FHA loan with a credit score as low as 500, but a conventional loan requires a credit score of at least 620.
Q: What can I do to improve my credit score?
A few actions you can take to raise your credit score are as follows:
- Pay your bills on time.
- Keep your credit card balances low.
- Dispute any errors on your credit report.
- Become an authorized user on a credit card with good credit.
Q: How can I shop around for the best mortgage rates?
A: You can shop around for the best mortgage rates by comparing quotes from multiple lenders. You can also use a mortgage calculator to estimate your monthly payments.
Q: What are the closing costs for a mortgage?
A: Closing costs are the fees that you pay to finalize your mortgage. These fees can include things like origination fees, appraisal fees, and title insurance.
Q: How much of a down payment do I need to make?
A: The amount of down payment you need to make will vary depending on the type of loan you’re getting. For example, you’ll need to make a down payment of at least 10% for an FHA loan.
Additional Resources
What Is the Minimum Credit Score to Get a Mortgage?
The minimum credit score to get a mortgage depends on which type of mortgage you’re applying for. It also depends on which lender you’re working with. Some lenders are more willing to work with low-credit-score borrowers than others.
Improving Your Credit Score Vs. Getting a Mortgage Now
You could spend several months or more improving your credit. But what will happen to interest rates during that time?.
- Even with your better credit, you might not be able to save any money if they increase.
- If they decline, you may be able to save money thanks to your better credit and the cheaper rates offered by the market.
No one knows where interest rates are headed. The country’s most educated guess comes from the Federal Reserve, so that’s a good source to consult.
Find the Federal Open Market Committee’s (FOMC) most recent economic projections under the press release section of the Federal Reserve website. Do they think the federal funds rate is headed up or down?.
If they think it’s headed up, mortgage rates could be headed up. Right now, they expect the federal funds rate to stay around zero through 2021 and possibly 2022. But that’s a prediction, not a guarantee.