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If you’re interested in buying a home, you may be concerned about whether your credit score is high enough to get a mortgage.
First, the good news: It’s possible to get a home loan with bad credit. But your loan options may be limited, and you may not receive the best rates or loan terms.
Here’s everything you need to know about home loans for bad credit, and how to boost your credit to improve your chances of getting competitive loan terms.
What’s considered a bad credit score?
Before you can determine what your mortgage options are, it’s important to understand what’s considered a “bad” credit score.
First things first: You don’t actually have just one credit score. In fact, every consumer has a slew of credit scores, which means there isn’t just one threshold for having a bad credit score.
While the credit-scoring model used for your home mortgage application depends on the lender you choose, many use the FICO scoring model. FICO is arguably the most popular and well-known credit-scoring model, and it’s used by more than 90% of top lenders in the United States.
A FICO credit score can fall into one of five categories.
Exceptional: 800 and above
Very Good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 580 and below
A fair credit score is usually considered below average, while a poor (or bad) score will put into question your credibility as a borrower and may make it difficult to take out a new loan.
Can I get a home loan with bad credit?
Even if you have bad credit, don’t despair. Many lenders offer home loans for bad credit borrowers, especially if other personal and financial factors check out.
While your credit score plays an important role, lenders look at other key factors when deciding whether or not to approve a loan application.
Your down payment — Generally, borrowers who can put down more cash on their new home will receive better loan terms. The higher the down payment you offer, and the greater the risk you’re willing to take on with your new home, the more you may be able to overcome a bad credit score with your new lender.
Your income — A lender’s primary concern is mitigating risk. Because of this, a lender only approves borrowers who will be able to fulfill their loan obligations. The higher your income (and the lower your monthly housing expenses are as a factor of that income), the better your approval odds.
Your overall debt burden — Lenders also want to ensure that you’re not already overextended, or that too much of your income is going toward existing debt. For that reason, a lower debt-to-income ratio will be more enticing to a lender.
Your credit history — Your credit score could be low simply because you don’t have a long enough credit history. Luckily, many lenders will consider this during underwriting.
While these factors may help you get approved for a mortgage loan, even with a poor credit score, you’ll still face a higher interest rate and monthly mortgage payment. But this may be a worthwhile trade-off if you want to get approved for a mortgage.
You can use Credible to compare mortgage rates and see what you may qualify for.
What are my home loan options?
Home mortgage loans fall into two main categories: government-backed and conventional.
Both types of loans are offered by private lenders and can be used to purchase a new home or refinance an existing property. But conventional loans aren’t backed by a government agency. Lenders who offer government-backed loans tend to offer a bit more leniency throughout the application and underwriting process because they’re protected if you aren’t able to repay your mortgage.
Conventional home loans are offered by private lenders such as banks, credit unions, and other financial institutions. They aren’t backed by a government agency, so they don’t offer many of the same benefits as government loans (such as lower credit score or down payment requirements).
Each lender sets its own requirements, so there’s technically no minimum credit score for a conventional loan. But many private mortgage lenders will only offer conventional loans to borrowers with credit scores of 620 or higher.
Backed and insured by the Federal Housing Administration, FHA loans offer many important benefits. These loans, which you can get through FHA-approved lenders, may only require a 3.5% down payment and a credit score as low as 500.
Maximum loan limits for FHA mortgages depend on your location and credit score. While FHA loans tend to be the most helpful for first-time buyers and moderate- to low-income borrowers, there are no income limits to qualify.
VA loans are backed by the Department of Veterans Affairs and only offered to eligible military members, veterans, and surviving spouses. These loans can either be VA direct (issued by the VA) or VA-backed (issued by a private lender but insured by the VA).
The vast majority of VA loans are made with no down payment, and they generally come with better loan terms than private lenders. There’s technically no minimum credit score requirement to qualify for a VA loan. The VA does require that private lenders consider a borrower’s overall financial picture before making a lending decision, rather than basing it on credit history alone.
Offered to low- and moderate-income families in certain rural areas, USDA loans can make homeownership a possibility for many families looking for safe, sanitary, and adequate housing. These mortgage loans have no down payment requirement and can be used to buy a home or even build a new one.
A minimum credit score of 640 is preferred, but there isn’t an official score requirement. Borrowers will have to meet certain income requirements, though, and purchase an eligible property in a rural area.
Fannie Mae HomeReady
Designed for low-income borrowers, the Fannie Mae HomeReady mortgage is available to new homebuyers and refinancing owners alike. This mortgage loan does have maximum income limits to qualify, but allows for a down payment as low as 3%.
HomeReady borrowers should ideally have a credit score of 620 or higher, though the best loan terms are available to borrowers with scores of at least 680. First-time homebuyers are also required to take a homeownership education course prior to closing.
Freddie Mac HomePossible
HomePossible by Freddie Mac is a government-backed mortgage loan designed for low- to very-low-income borrowers, especially first-time homebuyers. It offers down payments as low as 3%, but does have income maximum limits based on location.
If you have poor credit — or even no credit at all — this loan may be worth a look. It offers mortgage loans to borrowers with no credit limit, and even approves borrowers with no credit score as long as they meet certain loan-to-value ratio requirements.
How do I get a home loan with bad credit?
Buying a home with bad credit is possible, but you may have to do a bit more research. Shop around to see what loan and lender options are available and to help you find the best possible mortgage terms for your individual situation.
Follow these steps to help you find a home loan for bad credit.
Compare multiple lenders to get the best possible interest rate for your situation. Some lenders may provide pre-approvals with an estimated interest rate, so you can gauge your options before you begin the full loan application process.
In many cases, using a loan aggregator platform can be the easiest option. You can enter your information once and get multiple offers from lenders.
Credible lets you compare mortgage rates from multiple lenders in one place.
Look into your bad credit home loan options
Explore the types of bad credit home loans available to you based on your down payment amount, income, and your location. For example, you can only get a USDA loan if you live in a rural area; if you do qualify, though, these loans may offer access to no-down-payment mortgage loans with no credit score requirement.
Consider a co-borrower
If you have bad credit, adding a co-borrower with good or excellent credit to your mortgage loan may not only boost your chances of approval, but also open the door to better loan terms. This co-borrower could be a spouse, parent, sibling, adult child, or any other trusted adult who’s willing to share the financial obligation of your mortgage loan.
Shop around for assistance
Many different down payment assistance and first-time homebuyer programs exist to make the entire process easier for eligible buyers. These programs can help relieve some of the burdens involved with buying a home, as well as offer guidance through the process.
Depending on where you’re buying, what your household income is, and whether you’re a first-time homebuyer, shop around to see if there are any assistance programs you may qualify for.
Make a down payment
While some mortgage loans don’t require a down payment, most buyers can expect to pay something out of pocket toward their new home. If you have bad credit, your down payment can be even more important.
A larger down payment can not only unlock better loan terms (such as a lower interest rate), but may also improve your chances of loan approval in the first place. If you’re having a tough time finding the right home loan with bad credit, consider whether you need to increase your down payment amount.
Avoid making any financial changes
From the time you start thinking about buying a new home through the final closing of your mortgage, you should avoid making any big financial moves. This could include opening a new credit card, making a large purchase, closing a long-standing line of credit, missing a payment, and more.
Sudden financial moves can temporarily affect your credit score; even if your score isn’t affected, the activity may be concerning to lenders. If you open new accounts or change your debt burden, credit utilization, or available credit during the underwriting process, your initial loan terms could change. The lender could also withdraw from the loan altogether.
Should I wait before getting a home loan if I have bad credit?
Whether you should wait and improve your credit score before buying a home really comes down to personal choice.
You do have home loan options for bad credit, so you don’t have to wait. You can utilize certain programs to purchase the home you want now, while continuing to work on your credit along the way. You may choose to refinance down the line when your credit improves.
But the best loan terms and options are given to borrowers with better credit, so in some cases, it may make more sense to hold off. You may improve your odds of getting a loan if you improve your credit score first. You’ll also lower your interest rate if you have a better credit score, which can save you a lot of money over the life of the loan.
How can I improve my bad credit score?
If you want to improve your credit score before buying a home, here are a few strategies.
Pay down credit cards and personal loans. Your credit utilization ratio — or the percentage of your available credit that you’re using at any given time — makes up a significant portion of your credit score calculation. By paying down your balances, you’ll not only boost your credit score but also reduce the amount of interest you pay over the life of that repayment.
Make all payments on time, every month. The importance of on-time payments really can’t be overstated. A single late payment reported on your credit can drop your score by tens of points, and will take seven years to disappear from your credit report. Be sure that you’re always paying at least the minimum due on all your accounts, and set up automatic payments to avoid oversight.
Review your credit report for errors. Unfortunately, credit report errors are not uncommon. You may have errors on your reports that are bringing your credit score down and need to be removed. Be sure to pull your credit reports regularly from the three main bureaus — Equifax, Experian, and TransUnion — and check them for any mistakes. Look at accounts, names, total balances, and any negative reports such as late payments. If you find inaccuracies, dispute them with the bureau(s).
Add new accounts. If your credit score is low (or nonexistent) due to a limited credit history, adding new accounts can help. This might mean opening a credit card and paying off the total balance each month, or taking out a small personal loan to build your payment history. In some cases, being added as an authorized user on a spouse or parent’s card can be enough to boost your score.
Avoid hard credit inquiries. Hard inquiries are a necessary part of applying for credit, but you should avoid them if you’re trying to improve your score. Each inquiry will stay on your credit report for up to two years, but can drop your score by a few points for the entire first year. Additionally, too many inquiries in a short period of time can be a red flag to potential lenders.
If you decide you’re ready to buy a house, you can use Credible to compare mortgage rates.
About the author: Stephanie Colestock is a Washington, D.C.-based writer who has more than 10 years of experience in writing about investing, business, and personal finances. She’s contributed to outlets such as Yahoo! Finance, MSN, Investopedia, Credit Karma, Credible, and more. She holds a bachelor’s degree from Baylor University and is in the process of earning her CFP® certification.