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How to Get Home Loans for Bad Credit

Written by Marc Guberti

Marc Guberti is a Certified Personal Finance Counselor who has been a finance freelance writer
for five years. He has covered personal finance, investing, banking, credit cards, business
financing, and other topics.
Marc’s work has appeared in US News & World Report, USA Today, Investor Place, and other
publications. He graduated from Fordham University with a finance degree and resides in
Scarsdale, New York.
When he’s not writing, Marc enjoys spending time with the family and watching movies with
them (mostly from the 1930s and 40s). Marc is an avid runner who aims to run over 100
marathons in his lifetime.

Updated February 13, 2024​

7 min. read​

A home loan can help you buy your first home or an investment property. While these loans can make homeownership more obtainable, mortgage lenders have a few requirements. Many of them may require a good credit score to get enough financing for a property.

This stipulation can make many low-credit borrowers feel priced out of the market. A lower credit score presents several roadblocks, but it is still possible to get capital even if your credit score isn’t great. This guide will explore how you can get a home loan with bad credit and some of the options.

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Understanding Credit Score and its Implications

Creditors look at your credit score to determine if you can make on-time payments for your debt. This is an important consideration since creditors only make a profit if borrowers keep up with their expenses. A lower credit score presents the lender with more risk and can limit a consumer’s choices.

What is Considered Bad Credit?

“Bad credit” depends on the credit scoring model you use. While there is a lot of overlap between FICO scores and VantageScores, the latter offers some additional leeway between good and bad credit. A FICO score below 580 is treated as bad credit, while a poor VantageScore is any number below 600.

Why Bad Credit is Risky for Home Loans

Bad credit is risky for home loans because of the context surrounding a bad credit score. People go from good credit scores to bad credit because they fall behind on payments and have high balances on their credit accounts. Bad credit can indicate a shaky financial foundation and make it more challenging to keep up with monthly loan payments. Lenders recognize this risk and may make the loan fees and rates more expensive to justify giving them out to low-credit borrowers.

Impact of Bad Credit on Home Loans

A bad credit score can have a meaningful impact on your house search and the type of loan you receive. These are some of the details to keep in mind.

Is It Possible to Get a Home Loan with Bad Credit?

You can get a home loan with bad credit, but you will have to dig deeper to find lenders who will work with you. Most financial institutions and credit unions will not work with consumers who have bad credit. These institutions may make exceptions if you seek out a government-backed mortgage like an FHA loan.

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Effect on Interest Rates

You will end up with a higher interest rate if you have bad credit. Lenders need a higher potential return to justify the risk of giving out a loan to a consumer with bad credit. Making on-time loan payments will improve your score and can help with a refinance in the future if you want a lower rate. However, you will have to factor in a higher interest rate in your budgeting.

Impact on Loan Approval and Terms

It can take longer to receive approval, and you may get rejected by more lenders. The terms also may not be optimal, and you will have less flexibility. Some homeowners take out 15-year mortgages because they want to get out of debt sooner. However, an aspiring homeowner with bad credit may have to take out a 30-year mortgage even if they want a 15-year mortgage.

While a 30-year mortgage has higher interest in the long run, the monthly payments are lower in the present. That helps borrowers keep up with payments and will result in a better debt-to-income ratio.

What Kinds of Home Loans Can You Get for Bad Credit?

Consumers won’t have as many choices if they have bad credit. Conventional loans will be out of reach since these loans have credit score requirements as low as 620. However, you can still choose from several home loans even if your credit score is as low as 500.

  • FHA Loan: The Federal Housing Administration backs these loans. You can get a loan with a credit score as low as 500 if you make a 10% down payment. You can make a down payment as low as 3.50% if you have a 580 credit score. These loans come with insurance premiums. It may be a good idea to refinance out of this loan once you have 20% equity in your home and your credit has improved.
  • USDA Loan: These loans are optimal if you want to buy a home in a rural area. Most lenders require a 620 credit score or higher, but this loan technically doesn’t have a credit score requirement. You may find a lender offering USDA loans with more generous requirements. You typically do not need to make a down payment. USDA loans do not have private mortgage insurance premiums.
  • VA Loan: Qualifying veterans and spouses can take out a VA loan with a credit score as low as 500. However, most lenders will want to see a 620 credit score or higher for these loans. You can get one of these loans without any money down if the sales price is not higher than the home’s appraised value. These loans also have lower interest rates and no private mortgage insurance premiums.
  • Non-Conforming Loan: These loans do not conform to the guidelines set by Fannie Mae and Freddie Mac. Some non-conforming lenders ignore your credit score and focus on metrics like cash flow and income instead. It’s also possible to get loans that start off with interest-only payments, but these loans can be troublesome if you don’t have the resources to make the monthly principal payments when they arrive.
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What Other Factors Do Lenders Consider?

Your credit score is a critical factor that determines the type of loan you receive and if you qualify. However, lenders will review additional factors during the application process:

  • Debt-to-income ratio: This ratio measures your monthly debt payments as a percentage of your income. If you earn $10,000 per month and pay $2,000 per month in debt, you have a 20% debt-to-income ratio. Most lenders will not work with borrowers who have DTI ratios above 50%. The highest DTI ratio is lower for conventional mortgages. A lower DTI will improve your chances. Lenders will also look more closely at your income’s consistency and the types of debt accounts you have.
  • The down payment: A higher down payment will improve your chances of getting approved. You can even end up with a lower interest rate since the down payment removes a lender’s risk.
  • The property’s value: Lenders will assess the property’s valuation when giving out a loan. The lender ends up with the property if the borrower defaults. Lenders want to make sure the borrower isn’t overpaying for the house since that can cut into the lender’s profits if the lender has to foreclose on the property.

How to Get Home Loans for Bad Credit

People with bad credit scores can get homes and use the monthly mortgage payments to repair their credit over time. You can follow these steps to get closer to obtaining a home loan.

Step 1: Assess Your Credit Report

It’s easier to improve in something if you actively track it. Staying on top of your credit score will help, and your credit report contains insights that can add more points to your score. This report may contain errors that you can dispute and then end up with a higher score. You can also see which accounts you have to pay off to raise your score.

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Step 2: Shop Around for Interest Rates

Once you review your credit report, it’s time to shop around for interest rates. Reach out to several mortgage lenders instead of accepting the first offer. Shopping around can help you find a lower interest rate and save thousands of dollars in the long run.

Step 3: Find Lenders Offering Home Loans for Bad Credit

When shopping around for interest rates, make sure you narrow your search to lenders who offer home loans for bad credit. Lenders who provide government-backed loans and non-conforming mortgages are usually more lenient with their credit requirements.

Step 4: If Available, Get Mortgage Pre Approval

A mortgage preapproval involves a lender checking your credit, income, assets, and other information to assess what type of loan you can get. Preapprovals are better than pre-qualifications and expire after 60-90 days. A preapproval isn’t required, but it can lead to a faster application process.

Step 5: Make Financial Improvements

Raising your income and lowering your expenses will help you qualify for a better home loan. People can reduce their expenses right away by tracking their costs and trimming unnecessary purchases. It takes more time to get a side hustle, develop new skills, work overtime, or get a raise. However, income growth has a much higher ceiling than cost cutting.

Step 6: Avoid Credit Mistakes

Mortgage lenders will carefully look over your credit and your history. Making on-time payments will help, but a common mistake is to apply for too many loans or lines of credit. Each of these applications results in a hard credit check, which will temporarily reduce your credit score by a few points.

It can even become problematic if you apply for too many mortgage loans. Make sure you submit all of your applications within a 14-day window to have all of the applications treated as one hard credit check. If you submit mortgage applications across several months, you will end up with multiple hard credit inquiries that will take more points off your score.

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Other Tips to Increase Your Chances for Approval

Every good action you take will increase your chances. These are some areas to focus on if you want to get a home loan sooner.

Improving Your Credit Score

There is no secret here. It may be a good idea to wait a few months before buying a house so you have time to repair your credit score. A higher score will open up more loan opportunities, lower interest rates, and higher loan amounts.

Saving for Down Payment

A higher down payment reduces the lender’s risk and will make financial institutions more eager to do business with you. Saving for a down payment will also reduce how much interest you pay over the loan’s lifetime.

Lowering Your DTI Ratio

Almost every lender will look at this ratio. You can trim your debt-to-income ratio by making more money and paying off your balances. You can also refinance your debt so you can make lower monthly payments.

Considering a Co-Signer

A co-signer can make it much easier to get a home loan. The creditor will look at the co-signer’s credit score, DTI ratio, and other details during the loan application process. However, it is risky for a co-signer to help someone with low credit get a home loan. The co-signer will be responsible for loan payments if the borrower cannot keep up with them. You may want to consider a friend or family member as a co-signer since the co-signer must trust you.

Conclusion: Getting Home Loans with Bad Credit

A home loan makes homeownership more accessible to many people. While a bad credit score creates some obstacles, it is possible to get financing and buy your first or next home, even if your score isn’t the best. Comparing lenders, knowing your options, and strengthening your financials can help you get better rates and terms.

When seeking out mortgage lenders and home loan options, don’t forget to consider CrossCountry Mortgage. They offer a variety of mortgage purchase loans for individuals with bad credit, including FHA loans, VA Loans, and USDA loans. They also offer down payment assistance for first-home buyers of up to $6,500.

At CrossCountry Mortgage, they understand the importance of making informed decisions regarding your mortgage journey. That’s why their team of experts is dedicated to providing you with personalized guidance and tailored solutions that align with your specific financial needs.

Get in touch with one of their mortgage loan officers by filling out this simple form with no obligation. Let CrossCountry Mortgage help you get the home loan you deserve.

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FAQs About Getting Home Loans for Bad Credit

What is the easiest home loan to get with bad credit?

Government-backed loans are the easiest ones to get if you have bad credit. FHA loans, USDA loans, and VA loans are available even if your credit score is as low as 500.

Can you get a mortgage with a credit score of 500?

It is possible to get a mortgage if you have a 500 credit score. You will have to make a 10% down payment to get an FHA loan with a 500 credit score.

What is the lowest credit to get a home loan?

Most lenders will not work with consumers who have credit scores below 500. If your credit score is above 500, you will likely have to get a non-conforming home loan or a government-backed home loan.

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