How to Get a Home Loan When You Have Bad Credit Staff
Bad Credit
Bad credit may seem like it stands between you and a new home purchase. Fortunately, there are ways to get a mortgage even with bad credit.

By taking the proper steps, you can get a mortgage loan with bad credit, and this transaction can even help you to improve your credit for the future. It's important to learn about the process and discover the facts about low credit scores and mortgage lending.

What's a Low Credit Score?

A credit score ranges from 300 to 800 for the 4 different credit reporting bureaus. When considering large lines of credit, like a home mortgage, any credit score lower than 580 is considered high-risk (i.e. “bad”). Many factors go into these low scores, including lack of established credit, missed payments, and the amount of available credit that you have already been given. A number of free credit report websites can offer details on your credit score and the credit history that has impacted it. If your credit score is lower than 580, there are still options available for mortgages and home purchases.

Mortgage Options for People with Bad Credit

People with bad credit often don't have the disposable income to provide a substantial down payment on their homes. For this reason, alternative home loans are offered to this clientele. For example, FHA loan providers can give you a down payment of as low as 3.5%. VA lenders offer fee waivers and lower interest rates and require no down payment. You have a lot of options in terms of the types of home loans available to you even with bad credit.

Federal Housing Administration (FHA) Loan

If you’re a first time home-buyer you can apply for a Federal Housing Administration (FHA) loan even with a credit score as low as 580. The loans are insured by the FHA and allow first time homebuyers to get a mortgage with a down payments as low as 3.5% if you have a credit score of 580 or higher. Keep in mind though you will have to pay private mortgage insurance (because of the low credit score), which can be around 1.75% of the loan amount upfront plus .85 percent annually. FHA loans are popular for all type of borrowers, including people looking to get a loan for mobile and manufactured homes.

Veterans Affairs Home Loan

If you are a current or former member of the armed forces, you can apply for a Veterans Affairs home loan. A VA loan allows you to finance 100% of the cost of the house with zero down payment. You also won’t need to pay monthly mortgage insurance, but most people who sign a VA loan are required to pay a funding fee of 2.15%. Typically you can get one even with less than ideal credit, though this may affect the terms of your loan.


If you live are looking for a single family house in a rural area you can get a loan with the United States Department of Agriculture (USDA). These are fixed rate, low interest loans that aren’t typically as stringent about your credit history, and do not require a  down payment. You will need to be someone who lacks “decent, safe and sanitary housing,” in order to qualify, and you need to buy in a rural area with 35,000 residents or less.

Conventional Loan (Conventional 97)

A credit score of as low as 620 can be enough to qualify for a conventional loan that is financed up to 97%. These are loans that aren't funded by the government and usually have a higher interest rate.

Home Equity Loan

If you already have a house with equity on it, then you can reply for a home equity loan, even with poor credit. Basically, you’re borrowing against the equity in your own home, which can be a good option if your credit is boxing you out elsewhere.


Not every lender allows it, but a co-signed loan can be a solid way to get a mortgage even if your credit is in bad shape. Basically, with a cosigned loan, you find someone with good credit - typically a close relative - who has good or better credit and is willing to sign off on the loan. The only drawback is that if you default, the co-signer is on the hook for the loan as well, and could suffer a hit to their credit rating.

Rent to Own Lease

Repairing your credit can take time, and by doing so, you can improve your ability to get a loan. One way to buy yourself some time is with a rent to own lease, which allows you to pay rent and live in the home with the option to buy it later. In the meantime, you can repair your credit and get better terms when you’re ready to sign for a mortgage.

Home Loan after Bankruptcy

A bankruptcy is by no means the end of it all, and you can still own real estate again down the road someday. Called “second chance home loans,” these deals can help you get a mortgage after you’ve taken the time to repair your finances - usually at least a year or two.

Homeownership and Opportunity for People Everywhere (Hope I)

With a HOPE I loan through the Department of Housing and Urban Development, low-income people living in public housing units can become homeowners, even with bad credit or low income.

Fannie Mae HomeReady Program

If you have at least a 620 credit score you may qualify for a HomeReady loan through Fannie Mae. These loans can come with down payments as low as 3 percent, and can even be given to people with no credit history at all, as long as they have a history of making bill payments like rent and car notes.

How to Refinance with Bad Credit

If you’re thinking of refinancing your mortgage then you probably already know the potential benefits - lower interest rates and payments, a shorter payment term, using some of your equity, consolidating debt, and more.

But how do you refinance with bad credit?

If you’ve been making mortgage and credit payments regularly and your credit has improved you’ll be in better shape, but even if not, you have options.

Besides repairing your credit or using a co-signer, you can pursue a number of government programs that can help you refinance and stay in better financial shape.

  • HARP

The Home Affordable Refinance Program, a government backed loan for underwater homeowners, ended in 2018, but there are other HARP-alternative options that have been designated to take it's place. 

  • FHA

People who have a Federal Housing Administration mortgage you can use the FHA program in order to refinance your mortgage, without having to do a credit check. This can really help you get better terms on your FHA mortgage, which tend to be low down payment with high monthly payments.

  • Home Equity Loan and HELOC

If your home has built up equity then you can use that equity to refinance your mortgage even if your credit is less than stellar.

Showing Responsibility for Paying Back a Loan

Even if your credit is low, recent actions can improve your chances of getting approved for an FHA loan. Once you apply for a mortgage through a lender, they will take a detailed look at your recent credit history. Showing signs of improvement and responsibility can make a big difference in your ability to get approved. By paying back other debts and consistently doing it on time, you can show that you would be a responsible buyer. For at least 6 months to a year, you should have on-time payments for any bills or other credit that you may have. Waiting this out and focusing on current payments can help you get approved for an FHA mortgage in the near future.

How Can You Increase the Odds of Getting Approved?

Keeping your credit record clean and clear of any red flags is an ideal way to get approved for a loan. For example, it's not a good idea to cosign on any other loans or credit applications for family and friends. This can directly impact your score and may look bad on a mortgage application. It's also a good idea to choose a mortgage amount that is realistic and affordable. If you cannot afford the 10% down payment for an FHA loan, consider shopping around for lower-cost homes.

Ensuring your financial stability is the best way to show lenders that you are a qualified buyer. This includes making payments on time, keeping the same employer, and building a proper savings account. All of these factors can combine with your credit score to help you get approved for a loan.

What are the Next Steps if You've Been Turned Down?

Getting turned down for a home loan may feel devastating, but it is not the end of the line. By being proactive, you can improve your situation and help increase your chances of getting approved for a loan in the future. One of the main things to focus on is increasing your credit score. 

To help get approved for new credit, you can apply for a secured credit card. These credit cards require a deposit placed on them in an amount equal to your starting credit line. For example, you may apply for a secured credit card with a $250 deposit. This deposit would give you a $250 credit line that can be used to make purchases and monthly payments. When reporting to credit bureaus, the card shows up as normal credit and allows you to build up your score.

It's also good to start saving as much money as you can at the same time. Building a larger savings account can help you make a larger down payment and get the mortgage loan approval that you seek.

Brick by brick, you can knock down the wall of bad credit and enjoy your future in a new home.

By understanding your low-credit options, you can still get approved for a mortgage.

Don’t let a low credit score stop your home-buying dreams.  Check out the best mortgage lenders for borrowers with bad credit. Staff's editorial staff is a professional team of editors, writers and experts with dozens of years of experience covering consumer, financial and business products and services.