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How To Get A Home Loan With Bad Credit

Sarah Sharkey6-Minute Read
February 14, 2022

Buying a house is a major financial commitment. If you have bad credit, you might think that closing on the home of your dreams is impossible. But the good news is that there are plenty of bad credit home loans out there for borrowers with less than perfect credit.

If you are ready to learn how to get a home loan with bad credit, explore your options with us below.

What Credit Score Is Needed To Buy A House?

A credit score is a three-digit number that can greatly impact your life. If you want to buy a home with financing, your lender will surely look at your credit score when evaluating your application.

Typically, credit scores range from 300 – 850. Credit scores ranging from 670 – 739 are generally considered good. Anything higher than 739 is considered either very good or exceptional.

A credit score between 580 – 669 would be considered fair. But a credit score between 300 – 579 would be considered poor. If you are hoping to obtain a bad credit home loan, your score will likely fall between fair and poor.

Borrowers seeking a conventional mortgage generally need a score of at least 620 to qualify. However, you may be able to obtain a mortgage with a lower score through the suite of available government-backed loans.

Why Do Lenders Look At Credit Score?

Wondering why a lender would look at your credit score in the first place?

Lenders look at your credit score to measure your creditworthiness. After all, you are likely asking the lender to provide a large sum to make your homeownership dreams come true. The lender needs to know that you’ll be able to repay the loan.

Beyond approval, the lender will use your credit score to determine what kind of rates and terms they can offer you. Generally, borrowers with lower credit scores should expect to pay a higher interest rate.

What Other Factors Are Considered For Home Loan Approval?

But since bad credit home loans exist, it is important to note that lenders will look at other factors in addition to your credit score.

Here’s what a lender may look at when evaluating your home loan application.

Employment History And Income

Lenders want to see a borrower with a strong history of regular employment. Plus, lenders prefer borrowers with a reliable income that has fewer swings.

If you have a rock-solid employment history with a reliable W-2 income, that will look great on your loan application.

Debt-To-Income Ratio

Your debt-to-income ratio (DTI) is a percentage that lenders look at to evaluate your finances. You can quickly estimate your DTI by adding up your monthly debts and dividing the sum by your gross monthly income.

For example, let’s say that your gross monthly income is $5,000, and you have $1,000 in debt payments. In this case, your DTI would be 20%.

Typically, lenders want to see a DTI of less than 43%, but there can be exceptions. Lenders may be wary of lending funds to borrowers who have a full plate of other financial commitments.

Funds For A Down Payment

The funds you have available for a down payment can affect your ability to qualify for a home loan and influence the amount of home you can qualify for.

If you are able to put 20% down, that makes a less risky proposition for the lender. With that, you may increase your approval chances. If you have less than 20% to put down, you may still qualify for some loan options.

Get approved to buy a home.

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Mortgage Options For Low Credit

Still wondering if you can qualify for a home loan with poor credit? The answer will depend on your unique situation. But borrowers should consider the bad credit home loans below to see what makes sense for their finances.

FHA Loans

FHA loans are backed by the Federal Housing Administration. If you are looking to buy a home that will serve as your primary residency and have the paperwork to prove your financial stability, the FHA loan could be a good option.

As a bad credit borrower, the best part of an FHA loan is the relatively low credit score requirements. You could be able to obtain a home loan with as little as 3.5% down if you have a credit score of 580 or higher. But if you have a credit score between 500 and 580, you’ll have to put down 10% to qualify for the loan.

VA Loans

If you are a veteran or current member of the armed forces, you could qualify for a VA home loan with bad credit. This loan backed by the U.S. Department of Veterans Affairs could allow you to get a home with $0 down. However, you will likely have to pay a funding fee.

While there is no minimum credit score requirement for a VA loan, lenders are able to set their own requirements. You'll need a minimum credit score of 580 to get a VA loan with Rocket Mortgage®

USDA Loans

USDA loans are backed through the U.S. Department of Agriculture to help homeowners in rural areas achieve the goal of homeownership. As a USDA loan borrower, you may not need to make a down payment. But there are specific income requirements that you cannot exceed in order to qualify.

Although the USDA doesn’t set a specific credit score requirement, you will likely need a score of at least 640 to qualify with most lenders.

*As of July 6, 2020, Rocket Mortgage is no longer accepting USDA loan applications.

Consider A Co-signer

A final option is to ask someone with good credit to co-sign on a mortgage. When someone co-signs, they essentially take personal responsibility in case of your default. With that, the cosigner would be responsible for repaying the mortgage if you could not do so.

The good credit score of the co-signer can boost your chances for the mortgage to be approved.

But understandably, many are wary of co-signing. After all, not many people would feel comfortable being on the hook for your mortgage. But if a co-signer is your best option, consider asking family members or close friends if anyone would be willing.

How To Raise Your Credit Score

There are some bad credit home loans out there. But in some cases, you may not be able to qualify with your current credit score. The good news is that it is absolutely possible to improve their credit.

Here are some ways to give your credit score the boost it might need.

Pay Off Debts

If you have outstanding debts, it is critical to make on-time payments each month. With a consistent track record of on-time payments, you may see your credit score improve.

Additionally, paying off existing debts can decrease your DTI and increase your credit score. Of course, paying off debt is easier said than done. But looking for ways to pay off debt could be the right move for your credit score.

Here are some strategies that could help you pay off debt:

  • Increase your income. Look for a lucrative side hustle or complete overtime at your main gig to give your income a boost.
  • Cut out extra expenses. If you can pare down to the bare bones, those funds could be used to make extra debt payments. Consider cutting back on take-out and canceling unused subscriptions to stretch your budget further.
  • If you are struggling to make your payments, consider negotiating with your lender. In some cases, they may be willing to work with you. Remember that it never hurts to ask!

Consider creative ways to stretch your budget when implementing these debt repayment options. If you have funds to push toward debt repayment, make those payments count. Put your extra funds toward the debt with the highest interest rate to tackle your debt problem as quickly as possible.

Avoid Hard Credit Inquiries

A hard credit inquiry will hit your credit report when you apply for any type of new credit. If you have too many hard inquiries on your report, then your credit score can suffer. With that, try to avoid any hard credit pulls in the months leading up to your home loan application.

For example, it would be a good idea to avoid opening a new credit card as you prepare to apply for a home loan. If possible, wait until your mortgage is finalized before moving forward with any other lines of credit.

Keep Old Accounts Open

One factor that your credit score considers is the average age of your credit accounts. The longer your credit accounts have been open, the better off your credit score will be.

With that, it is a smart move to keep old accounts open. Even if you aren’t planning to use an old credit card, keeping the account open can help your credit score.

The Bottom Line

If you are shopping for a bad credit home loan, it is possible to make your homeownership dreams happen. But the road may not be as easy with a bad credit score holding you back. Take the time to explore your bad credit loan options and weigh the options realistically.

Remember that even if you obtain a home loan with bad credit, you’ll likely be stuck with a higher interest rate which could cost you thousands over the course of your loan. In some cases, the best course of action would be to take a few months to work on improving your credit score.

If you decide that pursuing a home loan is the right option, apply online with Rocket Mortgage today.

Sarah Sharkey

Sarah Sharkey is a personal finance writer who enjoys diving into the details to help readers make savvy financial decisions. She’s covered mortgages, money management, insurance, budgeting, and more. She lives in Florida with her husband and dog. When she's not writing, she's outside exploring the coast. You can connect with her on LinkedIn.