Consumers with bad credit have a hard enough time getting a mortgage loan even in the most forgiving housing markets. It’s especially challenging now, in an environment of rising mortgage rates and historically high home prices.
Higher rates mean bigger loans and higher monthly mortgage payments, which in turn mean stricter lending standards regarding income and creditworthiness.
As GOBankingRates previously reported, the average cost to finance a home soared to $323,780 in 2022 from $298,324 in 2021 — the biggest single-year increase since the Mortgage Bankers Association began tracking the metric. This does not bode well for house hunters with bad credit.
There are some things you can do improve your chances of getting a mortgage loan with bad credit, however.
The first step is to understand what constitutes a “bad” credit score. The minimum score required for a mortgage varies by lender and loan type, according to Rocket Mortgage. Conventional loans typically have a minimum credit score of 620, while government-backed loans tend to have more lenient credit score requirements.
If your credit score is below 500, you might have a hard time getting any type of mortgage loan and should focus on increasing your score before applying for a loan.
“If you think you might apply for a mortgage in the near future, it’s a good idea to start improving your credit now,” Sharvan Selvam, commercial director for credit card company Aqua, said in an email statement to GOBankingRates. “A higher credit score can increase your chances of getting approved for a mortgage and potentially qualify you for better interest rates.”
Beyond that, he recommended saving for a larger down payment to help mitigate the impact of poor credit.
“Lenders are more likely to consider your mortgage application if you can offer a significant deposit,” Selvam said. “Diligent saving and aiming for a higher deposit showcase your financial stability and dedication.”
You might also consider getting a loan guarantor or joint mortgage, he added.
In addition, it’s a good idea to research loans that might make it easier on those with bad credit to qualify for a mortgage. Rocket Mortgage recommended looking into the following options:
- FHA loans: These are backed by the Federal Housing Administration and often have lower qualifying requirements for first-time buyers. The minimum credit score needed to get an FHA loan through most lenders is 580. A few lenders offer FHA loans with a minimum score of 500, but these will require a down payment of 10% rather than 5%.
- VA Loans: These are backed by the Department of Veterans Affairs and are offered to veterans, surviving spouses of a veteran, or those currently serving in the armed forces. In some cases you can get a loan for $0 down, though you will also have to pay a one-time funding fee. The VA has no specific credit score minimum, and some lenders might approve you with a 580 minimum score.
- USDA loans: These are backed by the U.S. Department of Agriculture and let you buy a home in a qualifying rural area with a $0 down payment. However, most lenders will require a 640 credit score to qualify, along with other income requirements specific to a USDA loan.