5 Home Loan Options if You Have Bad Credit

The FHA insures certain home loans, encouraging banks, credit unions and other FHA-approved financial institutions to offer mortgages to people with poor-to-fair credit. You repay the loan over a 15-year or 30-year period, paying a fixed interest rate. To qualify, you need to meet the following criteria:

• Credit score: To make a 3.5% down payment on a house, you must have a 580 credit score. Borrowers with a 500 credit score will need to make a down payment of 10%.
• Income: You need at least 2 years of verifiable employment.
• Debt-to-income (DTI) ratio: Typically, you need a maximum of 43%, including the monthly mortgage payment, but it can be 50% in some cases. The monthly mortgage payment cannot be over 31% of a borrower’s gross monthly income.
• Down payment: With a credit score of 580 or higher, you can put down as little as 3.5% of the home’s sale price.
• Other important information: FHA loans require mortgage insurance, and closing costs can’t be higher than 5% of your loan amount. The home you’re buying must be your primary residence. And you can use grants and gift money from family members to help make your down payment.

The Department of Housing and Urban Development (HUD) maintains an online search tool to help borrowers find FHA lenders in their area.

3. U.S. Department of Agriculture (USDA) loans^[7]

If you don’t have the money for a down payment and you’ve always toyed with the idea of escaping to the country, a USDA loan may be the right fit for you. You can only purchase a home in an eligible rural area, and there are several benefits to choosing this program, including low interest rates and lenient eligibility criteria:

• Credit score: To make a 0% down payment, your credit score can’t be lower than 640. People with lower scores or nonexistent credit may still be eligible, but the interest rates will be higher.
• Income: Your income must fall below the specified amount set by the U.S. government for the area where you want to buy the home. 
• Debt-to-income (DTI) ratio: Your DTI must be less than 41% of your gross income. And your mortgage payment can’t be higher than 29% of your monthly gross income. 
• Down payment: There’s no down payment required.
• Other important information: You must have mortgage insurance, and the home must be your primary residence.

You can purchase a home with a guaranteed USDA mortgage from a financial institution or qualify for a loan directly from the USDA.

4. Department of Veterans Affairs (VA) loans^[8]

Veterans, active-duty service members and their surviving spouses may qualify for VA loans.

• Credit score: The VA doesn’t set a minimum, but lenders do set their own credit score requirements. Lenders usually want to see a credit score of 640 or higher.
• Income: Lenders look at your income and monthly bills to determine whether you can make your monthly mortgage payments.
• Debt-to-income (DTI) ratio: The VA doesn’t set a DTI maximum, but mortgage lenders have their own criteria.
• Down payment: The VA has no minimum down payment requirement, though some VA-approved lenders do.
• Other important information: The closing costs are low, and the interest rates are competitive. First-time home buyers must pay a VA funding fee that averages around 2.3% of the loan. Even with no down payment, you won’t have to pay for mortgage insurance. Before applying for a VA loan, you need to show proof of service with a certificate of eligibility (COE). Eligible veterans can use their benefits more than once.

Aside from proof of service, the VA doesn’t set many eligibility rules for a VA-guaranteed loan. However, lenders who offer VA loans will have their own set of requirements. Make sure to shop around and compare lender requirements.

5. Statewide and local programs

Many states and local governments sponsor programs to help people buy their first homes. Down payment assistance, help with closing costs, grants and home buyer education programs are a sampling of the kinds of help these agencies and programs offer home buyers. 

The requirements, minimums, maximums and other criteria for these programs vary by state. Contact your local or state housing authority to find out what’s available. 

How To Get a Home Loan With Bad Credit

Now that you’re more familiar with some of the programs that help people with bad credit qualify for a home loan, check out these tips to boost your chances of eligibility:

• Research lenders in your area and identify those that are willing to work with borrowers who have bad credit.
• Apply for first-time home buyer programs and down payment assistance programs to boost the amount you can put down. The bigger your down payment, the better your chance of approval – even with bad credit.
• Ask family for help with your down payment.
• Talk to family members or close friends with good credit about the possibility of co-signing your mortgage loan.
• Plan to pay off your existing debt as quickly as possible before applying for a mortgage.

Finally, ask yourself how soon you want or need to buy a home. Would it be a better plan to concentrate on improving your credit first? Once you’re ready to jump onto the homeownership bus, compare options to find your best home loan opportunity.

Should You Get a ‘Bad-Credit Home Loan’ or Wait?

Owning a home instead of renting can be a smart, wealth-building option for many people. Under the right circumstances, a home’s growing equity can help you build a secure financial future. 

But before you take the leap, you should ask yourself:

• Why is my credit score low? Do your credit issues come from ballooning debt or having trouble paying bills? Getting a handle on these problems can reinforce better financial habits. Sound financial decisions and good credit behavior may lower the risk of future default on your home loan.

When your credit needs work, you may have to weigh whether now is the time to buy a home or build your credit. 

If you decide to move forward and have been approved for a home loan with bad credit, consider this:

• Will the mortgage payments exceed 30% of your monthly income? If you follow the 28/36 rule, you should be spending no more than 28% of your gross monthly income on mortgage payments. Spending more than can put you at higher risk of making late payments or not being able to pay your loan back.
• Does the loan estimate come with a very high interest rate? Research current home loan interest rates and compare them to your offer. If you worked on your credit score, could you get a better (read: lower) interest rate? A boost in your credit score could potentially save you thousands of dollars over the life of the loan.

Pressing pause on a home purchase to improve your credit score (even by a little bit) can potentially have a big impact on the types of loans and interest rates you’ll qualify for. Aim to reach the qualifying credit score of the loan you’re considering. And guess what else you can work on while you’re working on your credit? Your down payment. If you can, grow your down payment while you build your credit. 

All of these improvements can help you qualify for a home loan that comes with a lower interest rate and better terms for you (and your wallet).