You might assume getting approved for a mortgage to buy a house is impossible if you have poor or bad credit. However, even with a subpar score, there could still be options for you.
Minimum credit score to get a mortgage
There is no credit score threshold that will definitely disqualify you from getting a mortgage, but the lower your score, the harder it will be to find a lender to approve you for a loan. For conventional conforming loans, a 620 credit score is typically the minimum for consideration, while government-backed loans tend to offer more flexibility with lower credit scores (more on that below). Many mortgage lender advertisements for the best interest rates, however, assume a credit score of at least 740 or higher.
Credit scores generally range from 300 to 850, though some scoring models for auto loans and bank credit cards can stretch from 250 to 900. One of the most common scoring models is the FICO score. Here’s how the population breaks down in terms of credit scores, according to FICO:
- 800–850 (Exceptional): 21 percent
- 740–799 (Very good): 25 percent
- 670-739 (Good): 21 percent
- 580-669 (Fair): 17 percent
- 300-579 (Poor): 16 percent
Keep in mind that your score can vary between the three credit reporting bureaus, Equifax, Experian and TransUnion. Most lenders look at the middle credit score of the three when considering you for a mortgage.
How much will a low credit score cost you?
Mortgage lenders check your credit score when deciding whether to approve your loan application. It doesn’t just impact whether you’re approved, though — it also plays a major role in the interest rate you receive. The best mortgage rates are reserved for the borrowers who present the lowest risk.
The examples below are based on national averages for a 30-year fixed loan in the amount of $300,240 — 80 percent of the national median existing-home price as of March 2022, according to the National Association of Realtors, reflecting a 20 percent down payment.
|FICO score||APR||Monthly payment||Total interest paid|
|Note: APRs as of May 2022
Source: myFICO loan savings calculator
There is a dramatic difference between a 4.826 percent APR and a 6.415 percent APR — more than $100,000 — in interest over the life of the loan. Although this example doesn’t go below 620, the data is clear: Credit scores lower than that result in even higher financing costs.
How to get a mortgage with bad credit
While getting a mortgage for a home or refinancing with less-than-perfect credit can cost more, it might still be more appealing than continuing to pay rent. Here are tips to help you get a mortgage with bad credit:
- Shop around – Every mortgage lender is different, and some are able to offer lower rates than others. Research shows that getting multiple rate quotes can save you thousands over a 30-year mortgage.
- Think bigger than banks – Banks are not the only mortgage game in town; there are non-bank and online lenders, credit unions and other types of lenders, and they all want your business. Let them compete for it to see where you get the best offer.
- Explore bad credit home loans – If you’re a first-time homebuyer or otherwise qualify for low-income loan programs, you have options beyond a conventional loan. VA loans and USDA loans have no down payment requirement and no set credit score requirement, so ask your lender whether you’re eligible. The Fannie Mae HomeReady and Freddie Mac HomeOne and Home Possible loan programs are worth exploring, too, along with many first-time homebuyer programs.
- Find a co-signer – If you have bad credit, you might consider asking a family member or friend with better credit to co-sign your mortgage. This can help give your application a boost — but only if the co-signer is able and willing to take on the debt.
- See if you qualify for down payment assistance – If you’re looking to get a mortgage with bad credit, you might be worried about coming up with a down payment or hoping to boost your down payment to compensate for your credit situation. There are more than 2,500 down payment assistance programs nationwide, so there could be one you qualify for.
- Don’t make any big changes to your finances – A new credit card or big purchase can push down your credit score, so avoid taking on or applying for new debt during the mortgage application process.
- Watch for ‘guaranteed’ approval loans – If you see ads promising “guaranteed” approval for a mortgage regardless of credit, it’s a red flag. Under federal rules, a lender must verify the ability of a borrower to repay a mortgage, so there can’t be a “guarantee” unless that happens. On these kinds of offers, you might even get that guaranteed approval, but it’ll come with excessive or inflated costs.
Home loans for borrowers with bad credit
- Conventional non-conforming loan – Even with bad credit, you might be able to qualify for a conventional loan that’s “non-conforming,” or falls outside of Fannie Mae and Freddie Mac requirements for factors like credit score. This can be an option if you’ve declared bankruptcy or are otherwise credit-challenged.
- FHA loan – FHA loans are insured by the Federal Housing Administration and allow lenders to accept a credit score as low as 580 with a 3.5 percent down payment, or as low as 500 with a 10 percent down payment. The drawback here is that you’ll pay mortgage insurance.
- VA loan – If you’re a member of the military, a veteran or married to someone who has served in the armed forces, one of your benefits is the VA loan program backed by the U.S. Department of Veterans Affairs. You don’t have to come up with a down payment for this type of loan, and there are no minimum credit score requirements, although lenders do have their own credit standards.
- USDA loan – If you meet certain qualifications — earn less than a certain amount each year and want to buy a property in a certain area — the U.S. Department of Agriculture-backed lending program can help you become a homeowner with subpar credit.
7 tips to boost your chances of mortgage approval
To increase your odds of being approved for a mortgage, work on improving your credit well in advance of house-hunting or seeking a mortgage preapproval.
1. Check your credit report for free
Obtain your free credit reports from AnnualCreditReport.com and review them carefully. More than one-third of participants in recent Consumer Reports research found errors on their reports, and these mistakes can be costly. There are many issues that can drag down your credit score, such as an incorrect open loan attached to your name or an incorrectly-filed late payment.
If you see a mistake or outdated item — generally seven years, but sometimes longer for bankruptcies, liens and judgments — contact Equifax, Experian or TransUnion. Each of the credit bureaus has a process for correcting errors and out-of-date information.
2. Create a budget — and stick to it
To improve your credit standing, you’ll need to avoid racking up debt, so it’s important to get a realistic sense of what you’re spending. Create a budget that tracks income and expenses, and look for opportunities for small savings that could add up.
3. Make all payments on-time and in full
This is the gold-standard practice for good credit. Develop the habit of making bill payments on time so you avoid late fees and other needless costs, as well as blemishes on your credit report.
Although you’re working on obtaining a mortgage, you still need to earmark money for emergencies. Aim for at least $400 in savings to start. You can begin by setting aside cash every week or pay period.
Getting into the habit of saving regularly can help you now and when you’re ready to house-hunt. Not only will you need savings for a down payment and closing costs, you’ll also need to show the lender that you won’t be draining your account to zero in order to purchase a home.
5. Be careful about closing credit cards
In the lead-up to applying for a mortgage, don’t open any new credit cards, or close any. When you close a card, your available credit drops, which reduces your borrowing power. More importantly, it will impact your credit-utilization ratio, the measure of how much credit you have used relative to your total credit availability.
6. Take advantage of credit-boosting programs
To improve your credit score, you can explore booster programs such as UltraFICO and Experian Boost, which track the movement of cash in your bank account. It can also be a good idea to utilize credit monitoring services. Many banks offer these services, which will help you to get a sense of when and why your score goes up or down.
7. Consider a rapid rescore
Credit report changes can take time to go through the system, so improved scores might not show up in time for a mortgage application. In this case, you might want to get a so-called rapid rescore through your lender.
A rapid rescore allows a lender to submit proof to a credit agency that an applicant has made recent changes or updates to their account that are not yet reflected on their credit report, according to Experian. Borrowers cannot request their own rapid rescore, as the service is only offered to lenders. You’ll need to pay for a rapid rescore, but the expense might be worthwhile, since the lower interest rate you’ll receive could more than compensate for the fee for adjusting your credit.
Should you get a mortgage or increase your credit score first?
Should you take out a mortgage now, or increase your credit score before you apply for financing? The best answer: Plan ahead. Credit scores continually fluctuate, so it’s worth taking steps to improve your score before embarking on a home purchase.
A small increase can make a big difference. For example, even if you only raise your credit score to 665 or so from 650, you might be able to cut your mortgage costs significantly. Over the course of a 30-year mortgage, for instance, your monthly payment will be lower, and you would save more than $29,000, based on the above example from myFICO.