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Bad Credit Mortgage Loans: Facts to Know

Written by Banks Editorial Team
9 min. read
Written by Banks Editorial Team
9 min. read

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If you have a subpar credit score, it may lead you to believe that you can’t get approved for a mortgage to buy a home.

While it is true that your credit score is a key risk-assessment tool that lenders will look at when considering your mortgage application, it’s far from being the only factor that is taken into account by mortgage lenders.

The size of your downpayment, your debt-to-income ratio, and your existing cash reserves are some of the other factors that will help determine your eligibility for the mortgage.

The impact of your credit score will also depend on whether you’re applying for a conventional loan, VA loan, FHA, USDA, or some other type of mortgage loan.

So, in this article, we’ll help you understand all the factors you’ll have to take into account when applying for a bad credit mortgage loan in order to maximize your chances of success.

Mortgage Loans for Low Credit Scores
If you have a credit score of 500, Top Flite Financial features home loans, and cash-out refinance products for individuals with less-than-perfect credit. They lend down to a 500 credit score. Submit an online inquiry to learn more.

Can You Get a Mortgage with Bad Credit?

To start with, let’s get the most important question out of the way.

Is it at all possible to get approved for a mortgage if you have a poor credit score?

The answer is yes, it is.

There is no credit score that automatically disqualifies you from applying for a mortgage. If your score is on the lower end, the process might be harder for you than for someone with a credit score of 650 or above. However, it’s certainly achievable with the right guidance and information.

In the context of applying for a mortgage loan, ‘bad credit’ would typically imply a FICO score between 500 and 600. However, almost 93% of successful homebuyers have a FICO score of 650 and above.

So, if your credit score is under 600, you’ll need to have other factors working in your favor, such as a low debt-to-income ratio, substantial cash reserves, and a steady, relatively well-paying job. The ability to make a big downpayment on the house would also go a long way in persuading mortgage lenders to approve your loan application.

What is the Minimum Credit Score Typically Needed to Get a Mortgage Loan?

The minimum credit score needed for a conventional mortgage is typically 620, although this may vary slightly depending on the underwriting requirements of the specific lender.

FHA loans, which aim to make homeownership accessible for those who wouldn’t otherwise have qualified for a conventional mortgage, are available for borrowers with a credit score of 500 or above. However, to qualify for a loan with the lowest downpayment requirement of 3.5%, you’ll need to have a FICO score of at least 580. Some lenders will allow you to cash out up to 80% of your home’s equity with a 500 credit score.

So, even if your credit score is less than ideal, you can find a lender willing to consider your application or at least help you understand the steps you need to take in order to get approved for a mortgage in the near future.

What Credit Score Do Most Mortgage Lenders Look At?

Most mortgage lenders – including conventional and FHA lenders – will look at your FICO score when evaluating your loan application.

Created by the Fair Isaac Corporation (FICO), this credit score is determined by taking into account five important variables, including:

  • Current unpaid debts
  • Payment history
  • Length of credit history
  • Types of credit used
  • Credit utilization ratio

Based on these variables, you can be assigned a FICO score between 300 and 850. The higher the score, the greater the creditworthiness of the potential borrower. Typically, conventional mortgage lenders require a minimum FICO score of 620, while FHA lenders require a minimum score of 500.

FICO has designed different scoring models for each of the three credit bureaus – Equifax, TransUnion, and Experian. The ones most commonly used for mortgage lending are FICO Score 2 (for Experian), FICO Score 4 (for TransUnion), and FICO Score 5 (for Equifax). 

Types of Bad Credit Mortgage Loans

While many conventional mortgage lenders may not approve a loan application filed by someone with bad credit, there are a few mortgage programs that have been designed specifically to help applicants with poor credit scores become homeowners.

Commonly known as bad credit mortgage loans, these programs can help you get approved for an affordable mortgage even with a FICO score below 580. Here are a few of the bad credit mortgage loans that you can consider applying for, depending on your situation.

FHA Loan

The Federal Housing Administration helps people with poor credit get approved for mortgage loans by insuring those loans so that mortgage lenders can offer better terms and lower interest rates to riskier borrowers. For example, you can get approved for an FHA loan with a 3.5% downpayment if your credit score is 580 and above or a 10% downpayment if your credit score is between 500 and 579. Those with a credit score below 500 are not likely to be approved for an FHA loan.

VA Loan

The U.S. Department of Veterans Affairs (VA) offers this type of mortgage to active-duty service members, veterans, and surviving spouses of deceased service members. While the mortgage loan itself is offered by a private lender, it will be partially guaranteed by the VA in order to ensure more favorable terms for the borrower. As a result, you may qualify for a VA loan even if your credit score is relatively low. Many VA loans could also enable you to buy a house with no downpayment. 


If you’re a low-to-moderate-income borrower living in a rural area and looking to buy a house there, you may qualify for a USDA loan. This is a mortgage loan offered directly by the U.S. Department of Agriculture (USDA) or by a USDA-approved private lender. Since these loans are meant to help households with relatively low incomes, you don’t need an excellent credit score to be approved for a USDA loan.

State and Local Programs

Some states have designed programs to encourage homeownership among their residents, even if they have a less-than-perfect credit score. For instance, the State of New York Mortgage Agency offers SONYMA loans to first-time homebuyers. These loans have no minimum credit score requirements and provide other benefits like relatively low-interest rates and downpayment assistance. To find out if your state offers a similar program, you should contact your state housing department.

Mortgage Loans for Low Credit Scores
If you have a credit score of 500, Top Flite Financial features home loans, and cash-out refinance products for individuals with less-than-perfect credit. They lend down to a 500 credit score. Submit an online inquiry to learn more.

Pros and Cons of Bad Credit Mortgage Loans

Bad credit home loans like the ones mentioned above can offer a plethora of benefits to borrowers with a low credit score. Before taking out a mortgage, however, you should carefully consider the pros and cons of the offer instead of accepting the first loan you’re approved for.

So, here are some of the common advantages and drawbacks of taking out a mortgage with bad credit. You should keep these in mind before making your decision.


  • Homeownership: With the skyrocketing cost of rent in many parts of the U.S., buying a home can be a good way for Americans to build equity, gain housing security, and start their wealth creation journey. A bad credit mortgage loan will make sure that you’re able to reap the benefits of homeownership, even with a poor credit score.
  • Building Credit: If you have a poor credit score, then building your credit back up would naturally be one of your major priorities. One of the easiest ways to achieve this goal is to make your mortgage payments on time every month over the course of the next few years. If you can manage it well, taking out a bad credit mortgage loan could be the first step to improving your credit score.
  • Interest Rates: If you have a low credit score, then you may have to pay a higher interest rate on your bad credit mortgage loan than someone who has excellent credit. Since mortgage loans, in general, have lower interest rates than many other types of debt like personal loans and credit cards, it may still be the best way to build your credit back up without paying exorbitant amounts in interest. 


  • Downpayment: If you have a FICO score of just over 500, then you’ll almost certainly need to make a higher downpayment on the property you’re planning to buy. You may have to pay as much as 10% of the purchase price as a downpayment, as opposed to someone with a 580+ FICO score only needing to pay 3.5%.
  • Fewer Options: If you have poor credit, it’ll be hard for you to qualify for a mortgage loan from most conventional lenders. This may force you to take out a loan with higher interest rates than you’re comfortable with, which would, in turn, make your monthly payments more expensive. 

Your Options to Get a Mortgage Loan with Bad Credit

If you’ve considered all the pros and cons and decided that taking out a mortgage loan would be the right decision for you at this time, then here are a few options that could help you qualify for a bad credit home loan more easily.

Find an Alternative Lender

While conventional mortgage lenders are often hesitant to provide loans to individuals with poor credit, there are a number of alternative lenders who specialize in helping these individuals become homeowners. Lenders affiliated with the FHA or the USDA are some examples of such alternative lenders.

Private lenders, online lenders, and peer-to-peer lending platforms are also some alternative financing options that borrowers with poor credit may explore. However, these lenders often charge interest rates significantly higher than those charged by conventional lenders, so you should carefully consider the terms before taking out a loan. 

Get a Co-Signer

If your credit score is too low to qualify for the home loan, some lenders will allow you to get a co-signer or co-borrower for the mortgage you’re taking out. Having a co-signer will help boost your income and lower your debt-to-income ratio on paper. This will, in turn, have an effect on the loan amount that you can qualify for.

If you’re applying for an FHA loan, for instance, you can get an out-of-state co-signer or co-borrower to improve your chances of getting approved for the loan. However, you should be very careful when asking someone to be a co-signer for your mortgage loan. It’s a huge responsibility to take on, as your co-signer will be the one on the hook for the loan if you are unable to pay it back.

Improve Your Credit Scores

Over 35% of your FICO score is determined by your payment history. In other words, you can significantly improve your credit score by simply making the monthly payments of your existing loans on time.

Postpone your home-buying plans until you’ve spent a few months maintaining a flawless payment history, after which you may even qualify for a conventional mortgage with low-interest rates.

Lastly, you should definitely postpone buying a home if you have a pattern of missing payments and making late payments. This could significantly increase the risk associated with the debt, leading to much higher interest rates.

Don’t Get Any Hard Inquiries on Your Credit Score

Don’t apply for loans too frequently. This is because every time you apply for a new loan – be it a personal loan, a car loan, or a mortgage loan – the lender pulls your credit report to check your payment history and assess your creditworthiness. This process is known as a hard inquiry, and it can negatively impact your credit score.

Having too many hard inquiries on your credit report over a relatively short period of time can signal to lenders that you’re seeking loans too often. On the other hand, depending on your payment history and other factors, this could indicate a lack of financial responsibility.

So, be sure to only apply for a loan when you really need it, space out your applications as much as possible, and limit the number of hard inquiries on your credit report.

Other Requirements to Qualify for a Mortgage Loan

Apart from your credit score, there are also some other factors that might affect your chances of qualifying for a mortgage loan. These are as follows:

Employment History

You might be able to qualify for a mortgage loan with a relatively low credit score if you can show potential lenders that you have a steady employment history and a stable source of income at present. A steady employment history shows lenders that you can be trusted to hold down a job and make your monthly mortgage payments on time. Likewise, a good income proves that you can afford to make the monthly payments for the loan you’re taking out.

Property Appraisal and Insurance

Before approving your application for a mortgage loan, most lenders will want to have the property you’re planning to buy appraised. This is meant to ensure that the property is actually worth the amount you’re borrowing.

Most lenders will also want to ensure that you buy homeowner’s insurance as a buffer against any accidental damage to the property that might occur. Again, this is meant to protect the lender’s investment in the property (in the form of a mortgage loan).

Downpayment & DTI

You may qualify for a mortgage loan despite having a low credit score if you make a substantial downpayment on the property you’re trying to buy. Usually, homebuyers can make a downpayment of as little as 3% when taking out a conventional mortgage loan (with VA loans and some other programs even allowing a 0% downpayment).

However, if you have a low credit score, then you should aim to make a downpayment of at least 10% (and preferably 20%) of the purchase price of the house. The higher your downpayment is, the more likely you are to qualify for the home loan.

Similarly, most people need to have a debt-to-income (DTI) ratio of 43% or less in order to qualify for a mortgage loan. However, keeping in mind your low credit score, you should aim to bring your DTI down to 30% or less in order to improve your chances of qualifying for the mortgage loan.

How to Get a Bad Credit Mortgage Loan

Now that you know all about the different types of mortgage loans available to those with low credit scores, it’s time to start submitting your loan applications.

In the meantime, you can try to build up your credit score by making timely payments on your existing loans. You can also save money for a larger downpayment, try to find a co-signer for your mortgage, and contact your state housing department to see if they have any programs to help individuals with poor credit get a home loan.

There is no one way to get a bad credit mortgage loan. But you can increase your chances of qualifying for such a loan by exploring different avenues and making progress in your credit-building journey.

Top Flite Financial offers innovative home loan solutions to help you secure a mortgage loan, even with bad credit. They are known to have some of the most flexible credit guidelines in the mortgage industry, meaning you have a better chance of securing a loan, even with less-than-perfect credit. For example, you could get approved for a home loan or mortgage refinance with a credit score as low as 500.

Offering a wide range of mortgage loan products and refinancing your mortgage to get the cash to fund a project or save on your mortgage payments, Top Flite Financial can help you close a loan in just a few weeks. 

If you want to inquire about their home loans, submit a quick questionnaire, and a mortgage expert will contact you to discuss your options.

Mortgage Loans for Low Credit Scores
If you have a credit score of 500, Top Flite Financial features home loans, and cash-out refinance products for individuals with less-than-perfect credit. They lend down to a 500 credit score. Submit an online inquiry to learn more.

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