Home Loans for Bad Credit: Find a Lender That Works With You
Securing a home loan with bad credit can be a challenge for many borrowers, but it’s not impossible. With the right approach and knowledge, you can find loan options that work for your situation, even if your credit score is less than perfect.
Whether you’re a first-time homebuyer or looking to refinance, understanding how to get a home loan with bad credit can open up new possibilities for homeownership.
Need a loan solution built just for you? Try Rate’s Digital Mortgage application to see if our tailored loan options can help you achieve your financial dreams.
Can I Get a Home Loan with Bad Credit?
Yes, you can get a home loan with bad credit. Although mortgage lenders tend to prefer borrowers with good credit scores, several loan programs are designed to accommodate individuals with a bad credit score.
These programs include FHA loans, VA loans, and USDA loans, which have more flexible credit score requirements and lower down payment requirements.
These loan programs are backed by the Federal Housing Administration, Department of Veterans Affairs, and U.S. Department of Agriculture, respectively. They offer lenient terms, lower mortgage rates, and better loan terms than traditional conventional loans.
Understanding these options can help you find the right type of loan and achieve your goal of homeownership.
What To Know About Home Loans for Bad Credit
Bad credit home loans cater specifically to borrowers with low credit scores or a history of poor credit. These loans come with conditions that reflect the higher risk for lenders.
As a result, you might encounter higher interest rates and stricter loan terms compared to conventional mortgage loans. However, they provide a valuable opportunity for those looking to rebuild their credit history and improve their payment history.
What Do Mortgage Lenders Consider a Bad Credit Score?
A bad credit score is typically below 580 on the FICO score scale, which ranges from 300 to 850. Anything below 670 is considered less than ideal by many mortgage lenders.
Factors like missed mortgage payments, late payments, high credit utilization, and recent applications for new credit can lead to a lower score.
Types of Bad Credit Home Loans
If you’re looking to get a home loan with lower credit scores, there are several options that can make homeownership more achievable:
FHA Loans
FHA loans cater to those with lower credit scores or limited savings. With a down payment option as low as 3.5% and more flexible credit standards, FHA loans are a great choice for first-time homebuyers or people with past credit issues.
Can You Get an FHA Loan with a 500 Credit Score?
Yes, FHA loans allow borrowers with a 500 credit score to apply. You may need a larger down payment, but these loans have flexible credit history requirements.
VA Loans
Exclusively for veterans, active-duty service members, and eligible surviving spouses, VA loans offer the benefit of no down payment option and no private mortgage insurance (PMI). Even borrowers with less-than-perfect credit can access competitive rates, making this a standout option for qualifying applicants.
For more information see: Can you get a VA loan with bad credit?
USDA Loans
Designed for rural areas and suburban homebuyers with low to moderate income, USDA loans offer zero-down-payment options and favorable terms, even for those with limited credit histories. The key requirement is that the property must be located in a USDA-eligible area.
Conventional Loans with Non-Traditional Credit
While conventional loans usually require higher credit scores, some lenders may offer options for borrowers with non-traditional credit histories. Demonstrating a strong history of on-time rent payments or utility bills can sometimes offset a lower credit score.
Home Equity Loans for Bad Credit
Leveraging the equity in your home, these loans typically come with lower interest rates. However, cash-out options generally use your home as collateral, making this option riskier if you struggle to make payments.*
Subprime Loans
Though these loans come with higher interest rates and fees, they are specifically tailored to individuals with lower credit scores. While not ideal for everyone, they provide access to financing when other options are limited.
Bad Credit Mortgage Refinance Options
If you already own a home and want to refinance with bad credit, consider options like FHA Streamline Refinance, which requires no credit check, or VA IRRRL loans for existing VA borrowers.
Each loan option comes with its own set of pros and cons, so it’s important to speak with a Rate loan officer to explore the most suitable way forward based on your financial profile.
How to Get a Home Loan with Bad Credit
Here are a few steps you can take to get closer to getting a home loan with bad credit.
Step 1: Check Your Credit Report and Score
Start by reviewing your credit report from all three major credit bureaus: Equifax, Experian, and TransUnion. This helps you identify any errors that might be affecting your score and gives you a clear picture of your current credit history.
Step 2: Compare Bad Credit Mortgage Lenders
Research mortgage lenders that specialize in bad credit home loans. Look for loan options from credit unions and online lenders that are willing to work with borrowers with a low credit score.
Compare their interest rates, loan terms, and closing costs to find the best option for your financial situation.
Step 3: Consider Adding a Co-Signer
If your credit score doesn’t meet the minimum credit score requirements for certain loans, consider applying for a secured loan or adding a co-signer with good credit.
A co-signer can help lower your interest rate and increase your chances of getting approved.
Step 4: Get Prequalified
Getting prequalified lets you know how much you might be able to borrow without impacting your credit score. Many lenders offer prequalification to help homebuyers understand their borrowing potential.
Step 5: Complete the Application and Get Funds
Submit your mortgage application along with necessary documents, such as proof of income, your social security number, and bank statements. Once approved, you can receive your loan funds quickly, often within a few business days.
Bad Credit Loans Alternatives
If traditional loan options aren’t available, consider these alternatives:
Unsecured Personal Loans
Unsecured loans don’t require collateral but come with higher interest rates. They are ideal for those who don’t have assets to pledge but may need funding for purposes like a home purchase.
Joint Personal Loans
Applying for a loan with a co-signer or a joint borrower can increase your chances of approval and secure better terms.
This option is helpful when trying to meet the preapproval criteria set by lenders like Freddie Mac or Fannie Mae, which may offer flexibility for applicants with a low credit score.
Secured Credit Cards
Secured credit cards can help build or rebuild your credit. They require a deposit, which sets your credit limit. Using these cards responsibly can improve your credit score, making it easier to qualify for future loans.
Home Equity Loans
Using your home equity as collateral can secure a home equity loan or HELOC for home improvements, debt consolidation, or refinancing. This type of loan may offer a lower rate but comes with the risk of foreclosure if not repaid.
Borrowing from Family or Friends
Loans from a trusted family member or friend can offer favorable terms. While these loans don’t impact your credit report, it’s important to have a clear agreement to avoid misunderstandings.
Credit Union Loans
Credit unions often provide more flexible terms and lower interest rates, making them a good alternative to traditional mortgage lenders.
Many credit unions also offer down payment assistance for homebuyers and can work with those who have a lower credit score.
How to Improve Your Credit Before Applying
Improving your credit can help you qualify for better mortgage options and interest rates. Here’s how to boost your credit:
Pay Off Existing Debts
Reducing your debt-to-income ratio (DTI) by paying off high-interest debt, such as credit card balances, can improve your credit utilization and increase your appeal to lenders.
Review and Dispute Errors on Your Credit Report
Check your credit report for errors. Dispute inaccuracies with the credit bureaus (Equifax, Experian, and TransUnion) to quickly improve your score and meet eligibility requirements for better loan terms.
Increase Income or Find Additional Sources of Income
Increasing your income through side jobs or freelance work shows lenders you have the financial stability to handle monthly mortgage payments and can improve your chances of qualifying for more loan options.
How to Compare Loans for Bad Credit
When comparing loans, consider the following factors:
Compare APRs
The annual percentage rate (APR) provides an overall view of the loan cost. Compare APRs to find the best mortgage for your needs.
Consider Additional Fees
Look out for fees like origination, late fees, and PMI. Some loans, such as conventional mortgage options, require private mortgage insurance (PMI) if your down payment is below 20%.
Review Loan Terms
Evaluate the loan terms, including the repayment period, loan amount, and monthly mortgage payments. Choose the type of mortgage that best fits your financial situation and goals.
How to Avoid Bad Credit Home Loan Scams
Scams can be prevalent for borrowers with bad credit, so it’s essential to be cautious:
Recognize Warning Signs of Scams
Avoid mortgage lenders who ask for upfront fees, guarantee approval without a credit check, or offer terms that sound too good to be true. Verify that the lender is registered with the NMLS and follows real estate regulations.
What to Do If You’ve Been Scammed
Report the scam to your bank, the FTC, and the credit bureaus. Consider freezing your accounts to prevent further damage.
What Can I Do if I Have Bad Credit and Need a Mortgage?
FHA, VA, and USDA loans are ideal for borrowers with bad credit. They have lower down payment requirements and flexible terms for service members, homeowners, and first-time homebuyers.
How Can I Start the Mortgage Process Today?
Securing a home loan with bad credit is possible if you take the right steps and choose the best mortgage loan programs.
Our digital tools and expert loan officers are here to guide you through the process, offering personalized loan options tailored to your unique financial situation.
Ready to take the next step? Start by getting prequalified and explore tailored loan options through our Digital Mortgage application, designed to make the process easier and faster for you.
Take the next step with Rate today—because homeownership should be accessible to everyone.
*Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principal amount and will be paid off over the full loan term. Contact Rate, Inc. for more information
Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.
If Applicant self-reports credit score as “needs improvement,” Rate, Inc. will not run credit or provide credit scores via the Digital Mortgage. Applicant may request credit scores by contacting Rate, Inc.
Rate, Inc. does not provide credit counseling or credit repair services.