How to Get a Home Loan with Bad Credit

When your credit score isn’t where you want it to be, it can make big purchases seem out-of-reach — especially buying a home. After all, a poor credit score can make it more difficult to prove to lenders that you’ll be a responsible borrower and secure your mortgage approval. 

But don’t let your credit score discourage you. There are loan programs, credit improvement strategies, and workarounds that can help you qualify for a mortgage even with a low credit score. Read on to learn how to buy a home with bad credit, including what steps you can take today to get started. 

Key takeaways 

• If you want to buy a home with bad credit, check your eligibility for government-backed mortgages like VA or FHA loans. These loans have more flexible credit requirements. 
• Take time to save up a bigger down payment. This could balance out a lower credit score when applying for a home loan. 
• Work on improving your credit score by making on-time payments and reducing how much you owe on credit cards before you apply for a mortgage. 
• Look for mortgage lenders that specialize in borrowers with bad credit. They’ll be able to customize your loan options to your situation. 

Can you buy a home with bad credit? 

Bad credit does not automatically mean homeownership is out of reach. There are government-backed mortgages and alternative financing options that are especially designed to help first-time home buyers and others get a home loan with bad credit. Just be aware these programs often come with higher interest rates and additional requirements, which can make them more expensive over time than other options. 

What do lenders consider a bad credit score? 

Different credit scoring models have different criteria for what makes a credit score “good” or “bad.” One general guideline for FICO scores states that a score of 670-739 is good,  740-799 is very good, and 800 or higher is exceptional. On the other end of the range, a score of 580-669 is considered fair, while 580 or below is considered poor.  

If you want to buy a home with a bad credit score, you’ll likely need at least a score of 500. If your score is below 580, you’ll still find it difficult to qualify for a home loan.

Best mortgage options for bad credit borrowers 

The best types of home loans for people looking to buy a home with bad credit are FHA loans or VA loans, which are available to active service members, veterans, and their families. These home loans are backed by the federal government and have more flexible credit requirements than conventional mortgage loans. 

FHA loans 

FHA loans are insured by the Federal Housing Administration. These loans are available to borrowers with credit scores as low as 580 if you have a 3.5% down payment. If you put down 10%, you could be eligible with a credit score as low as 500. There are no income restrictions, but you’ll need to ensure your debt-to-income ratio (DTI) is low — ideally below 43% — to qualify. That means less than half of your income goes toward debt repayment, such as student loans, personal loans, credit card debt, or car payments.  

VA loans 

VA loans are loans backed by the Department of Veterans Affairs, and you must be an active service member, veteran, or surviving spouse of a veteran to qualify. These loans tend to offer more affordable interest rates than other types of loans as a benefit to military service members.  

Mortgage lenders who offer VA loans set their own income and credit score requirements, which is often around 600. AmeriSave accepts credit scores as low as 500 if other factors — your down payment or income — are strong. Most lenders want to see proof of income that demonstrates you can meet your expected monthly obligations, including your proposed mortgage and other debt payments. 

How to buy a home with bad credit 

Lenders look at much more than just your credit score when deciding whether to grant you a home loan. If you want to boost your odds of getting approved for a mortgage, then a larger down payment, a stable income, and a low debt-to-income ratio will help your application.  

Here are a few tips for improving your odds of mortgage approval when you have bad credit. 

1. Save for a larger down payment 

Increasing your down payment lowers the amount you have to borrow. Lenders like larger down payments because it lowers their risk. If you want to buy a home with a bad credit score, consider putting more money down.  

Although FHA loans are available with just a 3.5% down payment, increasing that to 5%, 10%, or even 20% could help you qualify. Asking for gift money for a down payment or spending some additional time saving up could put you in a better position to buy. 

2. Pay down existing debt 

High debt-to-income ratios combined with low credit scores make lenders cautious. If you lower your DTI, you may be a stronger applicant. To free up more monthly cash and bring down your DTI, focus on paying off high-interest credit cards (and keeping them paid off). After that, put any spare cash toward paying off other loans on your credit report. 

3. Improve your credit score before applying 

If you’re trying to buy a home with a bad credit history, work on improving your credit score. The best way to do that is by paying all of your bills on time. Late payments will have a negative impact on your credit score. 

Another way to get mortgage-ready and steadily improve your score is by reducing your credit card balances to less than 30% of your credit limit. This is also called lowering your credit utilization.  

Lastly, don’t forget to regularly check your credit report for errors. If you notice something wrong, tell the credit bureau right away in writing.  

4. Work with an experienced lender 

Some lenders specialize in helping low-credit borrowers get a mortgage. The best way to find a lender who can help is by shopping around and comparing at least three lenders, including the rates, terms, fees, and loan types they offer. Look for a lender that understands your financial situation and can work with you to find the right loan to buy a home.  

Get our best rate for you 

You can buy a home with bad credit — it just means you’ll want to do a little extra research and planning to find the right mortgage and lender for your situation. Work on building your credit while you prepare for your home purchase and look for an experienced lender who will guide you along the way.  

The Loan Experts at AmeriSave can help you understand all your options. Get started with our personalized Quote Tool today.  

Frequently asked questions 

Here are some commonly asked questions about getting a home loan with bad credit: 

What are the key steps for purchasing a home with bad credit? 

First, review your credit report so you know where you stand. Monitor your due dates so all your payments are on time and look for lenders who offer VA and FHA loans, which have more flexible credit requirements. If you can, save up for a larger down payment, which could improve your odds of approval. 

Are there home loan options available for buyers with bad credit? 

Two home loan options for those with bad credit include FHA loans and VA loans. Borrowers with credit scores as low as 580 (or 500 with a 10% down payment) may still qualify for FHA loans. You need to be a veteran, active-duty service member, or surviving spouse to qualify for VA loans, but the credit requirements may be lower than traditional mortgage options.