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Options For Bad Credit Mortgage Loans

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 27, 2024​

8 min. read​

A mortgage removes many barriers to homeownership by turning a considerable expense into monthly payments spread over 30 years. Although mortgages are a popular financial product for home buyers, not every buyer has a good credit score. These individuals may feel homeownership is out of reach because of their credit.

However, it is possible to get a mortgage loan even if you do not have the best credit score. Some mortgage lenders will work with consumers who have bad credit. This guide will outline some of your choices and some tips to keep in mind.

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Can You Qualify for Mortgage Loans with Bad Credit?

It is possible to qualify for mortgage loans with bad credit. You may have difficulty getting a conventional mortgage, but loans like the Federal Housing Administration (FHA) loan are more accessible. You can get financing for this type of mortgage loan even if your credit score is as low as 500.

How Does Bad Credit Affect Your Mortgage Options?

While a bad credit score doesn’t eliminate the possibility of homeownership, it does make the path to a mortgage more challenging. These are some disadvantages of applying for mortgages if you have a low credit score.

Higher Interest Rates and Fees

Mortgage lenders will look at your credit score before offering capital. A credit score helps lenders understand the level of default risk each borrower presents. A lower credit score indicates more risk for the lender since credit scores reach that level due to missed payments and other factors.

It’s a common practice for lenders to charge higher interest rates and fees for people with low credit scores. The lender earns a higher return if the borrower makes on-time payments but can reap higher payouts to reduce total losses if the borrower defaults on the loan.

Increasing your credit score before applying for a mortgage is often a better idea. However, if you do not want to wait any longer or see a great opportunity going away soon, you will have a higher interest rate and fees.

Less Flexibility with Loan Terms

Some home buyers want shorter-term lengths so they can get out of debt sooner. Shorter terms also minimize interest accumulation and can help people save money in the long run. There’s plenty of debate about a 15-year mortgage vs. a 30-year mortgage, but borrowers with low credit scores likely won’t get a 15-year mortgage.

Lenders want to make sure you can make payments on time. A shorter mortgage comes with higher monthly payments, which are more challenging to pay off. You may have to take out a 30-year mortgage even if you want to get out of debt sooner. This mortgage will have an elevated interest rate if you have a low credit score.

You won’t have as much negotiating leverage and may end up with suboptimal terms. You can refinance later if your finances improve, but you will not have as much flexibility with loan terms initially.

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Lower Limits

Mortgage lenders may be willing to give you capital, but they will also have lower loan limits. Borrowing more money over the same number of years will increase your monthly payments. That scenario also increases a mortgage lender’s risk. While lenders offer higher limits for people with good credit scores, they aren’t as inclined to make that offer to borrowers with low credit scores.

A high income can reduce a lender’s risk and prompt them to raise the limit. However, lenders are not obligated to set a higher loan limit. This setback can make some houses inaccessible due to financing, but that can change in the future if you build your credit score.

Risk of Property Loss

Homeowners can end up losing their properties if they fall behind on mortgage payments. The lender will take the property, which serves as collateral for the loan. While many people aspire to become homeowners, you shouldn’t rush into it. Taking a few extra months to strengthen your finances and raise your credit score can result in a better deal and property.

Things to Consider Before Getting a Mortgage with Bad Credit

A house will likely be the most expensive purchase you ever make. If you have bad credit, you should consider these factors before getting started:

  • How long can you wait? It’s better to wait patiently and build your credit score if that is an option. However, some people may want to buy a home now.
  • Budgeting: Review your monthly budget and see how much you can afford for the mortgage. Consumers who are having a tough time making ends meet may not want to end up with monthly mortgage payments that exceed their rent.
  • Income growth: Growing your income by pursuing side hustles, learning new skills, and advancing in your career will improve your debt-to-income ratio. Staying on top of your bills and improving your credit score will also be more manageable.
  • Trimming expenses: If you have never reviewed your monthly expenses, doing so can save you a lot of money. This approach works well initially but has diminishing returns since you can only remove so many expenses before getting into the essentials.
  • Ability to pay off other financial obligations: Consider how a mortgage will impact your ability to pay off other debt. If you fall deeper behind, getting out can be more difficult. You don’t want to put all of this effort into buying a home to only fall behind on payments. Establishing a strong financial footing will help you buy a better house than the ones currently available to you.
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Are There Any Mortgage Loans Specific to People with Bad Credit?

Government-backed loans are some of the top choices for consumers with bad credit. An FHA loan is available to many homeowners and has a credit score requirement as low as 500 if you make a 10% down payment. USDA loans and VA loans are also good options if you are eligible.

What are Your Options For Bad Credit Mortgage Loans?

Consumers have several choices of how they get financing for their houses. These are some of the types of mortgages worth considering.

Conventional Mortgages

Conventional mortgages are offered by lenders and are not backed by the government. Most lenders require a 620 credit score or higher for these mortgages.

Government-issued Mortgages

Government-issued mortgages offer more flexibility for consumers with bad credit scores. FHA loans, USDA loans, and VA loans are more generous with their requirements, but you have to qualify for them. FHA loans have broad requirements that make them accessible to anyone with the right credit score. VA loans are exclusive to qualifying veterans and spouses. You need to buy a house in a rural area to be eligible for a USDA loan. The USDA offers a useful Eligibility Map, which provides a good perspective but no guarantees.

Non-Qualified Mortgage Loans

A non-qualified mortgage loan is a financial product for properties outside of the scope of Fannie Mae and Freddie Mac. These loans often have higher interest rates, more flexibility in debt-to-income ratio requirements, and higher down payment requirements. Repayments may be interest-only in the beginning. These types of non-qualified mortgage loans can turn into a nightmare if the homeowner cannot afford the principal payments when they start.

Fannie Mae and Freddie Mac Programs

Fannie Mae and Freddie Mac Programs back conventional mortgages. These conforming loans have a few rules in place that limit how much you can borrow and if you are eligible. Most home buyers do not encounter these limits, but non-conforming mortgage loans are available if necessary.

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Other Options for Homebuyers with Poor Credit

These loans are the available financing options for people buying homes. The only other options are to delay your home purchase to build your credit score or get a co-signer with a good credit score. You can use the co-signer financial profile and credit score to get a loan. However, it may be difficult to get a co-signer, especially one outside of your family and friends. Co-signers become legally responsible to cover loan payments if the borrower falls behind.

Getting a Mortgage with Bad Credit

It’s possible to get a mortgage even if you have bad credit. These insights can help on your journey.

Steps to Take Before Applying for a Mortgage

Following these steps can result in a more seamless process with your mortgage application:

  • Review your credit report: You will see your credit score and which items are impacting your score. Addressing inaccurate items and paying off balances will improve your score.
  • Know what you can afford: Review your budget to ensure you do not buy a house that you cannot afford. An excessive mortgage payment can increase financial stress and the likelihood of a foreclosure.
  • Save up for a down payment: A higher down payment will give you more loan options. Continue to work on this part as you follow the other two steps.
  • Shop around: Compare the rates and terms from several lenders. Doing your research can help you save money and give you time to improve your credit score.
  • Apply for many mortgages within a 14-day window: Mortgage applications trigger a hard credit check, which hurts your score in the short run. This is a necessary step for getting a mortgage. However, every mortgage application within a 14-day stretch is only treated as one hard credit inquiry. Stretching out your mortgage applications over several months will hurt your credit score more than applying for them all within 14 days.
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Tips for Getting Approved Despite Bad Credit

You can still get financing even if you do not have the best credit score. These tips will help:

  • Look for a more affordable home: A less expensive house presents a lender with less risk. The home can also fit more comfortably within your budget.
  • Make a higher down payment: A higher down payment reduces the lender’s risk. Working a side hustle can help you save up for a significant down payment.
  • Look for government-backed loans: FHA loans, USDA loans, and VA loans are easier to obtain as long as you qualify for them.
  • Get a 30-year mortgage: These mortgages have lower monthly payments, which will help your debt-to-income ratio. Some lenders may only offer a 30-year mortgage if you do not have the best credit score.
  • Get a co-signer: The lender will look at the co-signer income and credit score when assessing your application.

Repairing Your Credit to Improve Mortgage Approval

It’s optimal to wait if you can and work on repairing your credit score. The house you are looking at may get sold by the time you repair your credit. However, it can be a better decision to let the house go to someone else while you get your finances in order. A home is a significant financial commitment, and any efforts to improve your credit score will make homeownership more doable in the long run.

Conclusion: Deciding if a Bad Credit Mortgage Loan is Right for You

A bad credit mortgage loan isn’t the most optimal way to purchase a house. You will have a higher interest rate and may have to settle for a smaller house in a less-than-ideal location. Mortgage lenders won’t offer as much capital, but some people can make it work.

You can always refinance your mortgage once your finances improve. However, homeownership is a significant financial responsibility, and not everyone is ready for it. Taking an extra year to build up your down payment fund and improving your credit score can give you better choices. You can save thousands of dollars in the long run by being patient.

But if you’ve already decided and are in the market for a home loan, it’s essential to consider CrossCountry Mortgage. They offer an array of mortgage purchase loans designed to accommodate individuals with less-than-ideal credit, including FHA loans, VA Loans, and USDA loans. Additionally, they provide valuable down payment assistance of up to $6,500 for first-time homebuyers to help you with your homeownership goal even further. They also offer mortgage refinancing options if you decide to refinance your home down the line.

Whether you are self-employed or have a non-traditional income, their lending options are designed to meet your specific needs. With a commitment to exceptional service and support, their team of knowledgeable mortgage loan officers will guide you through the entire home-buying process, ensuring that you select the right loan type for your situation.

Start your home-buying journey today by filling out their simple online form – with no obligation required.

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FAQ About Options for Bad Credit Mortgage Loans

Can you get a mortgage with a 500 credit score?

It is possible to get a mortgage with a 500 credit score. Government-backed loans like FHA loans, VA loans, and USDA loans are available if you are eligible.

What is the lowest credit score allowed for a mortgage?

You can get a mortgage with a credit score as low as 500. You will have to make a 10% down payment or higher on an FHA loan to get financing if you have a 500 credit score.

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

An FHA loan is one of the easiest home loans to obtain if you have bad credit. Government-backed mortgages are easier to get than conventional mortgages.

Can you get a mortgage with a 480 credit score?

It’s tough to get a mortgage with a 480 credit score. Most lenders do not work with consumers with 480 credit scores. While it’s possible that a single lender may exist that works with consumers who have 480 credit scores, it is extremely unlikely.

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