Can you get a mortgage if you have bad credit?

Can I get a mortgage if you have bad credit? That’s a question that comes up with readers from time to time, and the answer is this: If your credit isn’t great and you want a mortgage, you’re not always doomed—but you may pay a higher rate. According to March 17, 2022 rate data from MyFico, a borrower with a fair credit score between 660 and 679 can expect to receive an average APR of 4.46%. That’s compared to 3.85% for someone with an excellent credit score between 760 and 850. Over time, that could add up to a borrower with a lower score paying thousands more for their mortgage.

Sometimes you won’t be able to get a mortgage at all if you score is low. Indeed, some lenders have minimum score requirements. For example, both Freddie Mac and Fannie Mae require a 620 or higher, and many other lenders follow these rough guidelines as well. That said, it’s not impossible to get a loan if your credit score is lower. Here’s what pros told us. 

Look at FHA, VA and USDA mortgage loans

Depending on your situation, you can consider applying for an FHA or VA loan. “Both loan programs not only have less stringent credit requirements than most traditional loans do — but they’ve also got less strict income and down payment requirements as well,” says says Jacob Channel, senior economist at LendingTree. Adds Holden Lewis, home and mortgage expert at NerdWallet: “If your credit score is below 720 and you don’t have a 20% down payment, consider an FHA-insured mortgage or a VA-guaranteed loan if you’re eligible.”

What is an FHA loan?
An FHA loan is a US Federal Housing Administration insurance-backed mortgage loan that requires a lower minimum credit score than other loans. Borrowers can have a credit score as low as 500 to qualify, but those with scores between 500 and 579 will need to put 10% down, whereas those with a score over 580 only need to put down 3.5%.

FHA loans also require mortgage insurance and all FHA loans require the borrower to pay two insurance premiums; an upfront mortgage insurance premium which is 1.75% of the loan amount and an annual mortgage insurance premium which ranges from 0.45% to 1.05% depending on the loan term. If you borrow $150,000, your upfront mortgage insurance premium would be $2,625 and your annual premium would range from $675 to $1,575, divided into 12 months. 

What is a VA loan?
A VA loan is a government loan that’s available to active and veteran service personnel and their eligible surviving spouses. You can get a VA loan with zero down payment and they offer lower interest rates than other mortgages, plus they don’t have a monthly mortgage insurance requirement. VA loans don’t require a minimum credit score, and instead individual lenders determine their specific requirements. The VA doesn’t limit how much you can borrow, but the loan limit for a no-down-payment loan is $647,200 for many counties. Still, even with zero down, be prepared to pay closing costs and other fees, like a VA funding fee which ranges from 2.3% to 3.6% of your loan amount. You will also need to show that you have two months’ worth of mortgage payments in a reserve fund.

What is a USDA loan?
An USDA loan is a zero-down-payment mortgage specifically designed to benefit rural and suburban homeowners who have very low incomes, for homes that measure 2,000 square feet or less. Interest rates on these loans can be as low as 1% and borrowers with credit scores below 640 may be eligible for USDA loans, but will have to be manually approved, taking factors like cash reserves and low debt into consideration.

Shop around for the best mortgage rates and terms

Another way for low-credit borrowers to increase their odds of scoring a mortgage is to shop around and compare multiple lenders on rates and terms. Pros say 3-5 quotes is a good goal: “The more lenders you look at, the more likely you are to find one who is willing to work with you,” says Channel. 

But here’s something to consider: When you apply for a new line of credit, a hard inquiry is recorded on your credit report and has the potential to lower your score. “A hard credit inquiry will remain on your credit report for 24 months and can impact your score for the first 12,” says Glenn Brunker, president of Ally Home. This guide will help you learn how to shop for a mortgage without harming your credit score too much.

If you’re intimidated by shopping around on your own, utilizing a mortgage broker can be helpful in sussing out special rates as well as saving your time and fees. 

Improve your credit score before you apply for a mortgage

The good news is your current credit score is not permanent — and improving your score can lower your borrowing costs and give you more options to choose when closing on a loan. To do this, pay bills on time, pay down debt, and avoid opening new lines of credit. “After your payment history, your debt-to-credit ratio, also known as your credit utilization rate, is the next most important factor in your credit score. When you pay down your balances, your credit availability increases and in short, the lower your credit card, retail store, gas station and HELOC debts, the higher your FICO score,” says Brunker.

While fraud and credit reporting mistakes are out of your hands, they’ve been known to happen, and if they go undetected, you might be paying the price in the form of a lower credit score. “If you catch any inaccuracies in your report, you should contact the appropriate credit reporting agency immediately to report the problem,” says Brunker.

Improve your debt-to-income ratio before you apply for a mortgage

Your debt-to-income ratio is the sum of your monthly debt payments like your mortgage, car payments, student loans and credit card payments, divided by your gross monthly income. Lenders typically like to see a DTI ratio of no more than 36%, while a DTI of 43% is generally the highest a borrower can have and still get qualified for a mortgage.

Save more for a downpayment on a home

Typically, the more money you can put toward a down payment, the better the rate you’re like to receive. With that in mind, those who put 20% or more down on a home can generally expect to get a very competitive rate, assuming they earn a decent income and have a good credit score. “Of course, down payment isn’t the end-all-be-all when it comes to getting a good rate on your mortgage, and even if you can’t afford to put much down, you can still get a good rate if you’ve got a great credit score,” says Channel.

Consider holding off on getting a mortgage

Because a higher rate can make monthly payments more expensive by hundreds of dollars — and cost thousands of dollars in interest over time — Channel says it might make more sense for some poorer-credit borrowers to hold off on getting a mortgage and instead work toward boosting their score. “The higher your score, the more likely you are to find a lender and the better your rate will be,” says Channel.