Bad credit can complicate buying a home, but it doesn't automatically disqualify you. Government-backed programs, alternative documentation loans, and compensating-factor underwriting all exist specifically because millions of otherwise qualified buyers don't have a pristine credit file. The real question isn't whether you can get approved --- for most people, some path exists --- it's which option costs the least over time and whether it makes more sense to buy now or spend a few months strengthening your file first.

This guide walks through what actually counts as "bad credit" in a lender's eyes, which loan programs are built for lower scores, what each one costs, and how to put together the strongest possible application even if your score isn't where you'd like it to be.

This article is for general educational purposes only. It is not individualized financial, tax, or legal advice. Mortgage guidelines, rates, and fees change over time and vary by lender --- always confirm current numbers with a licensed mortgage lender before making a decision.

What Counts as "Bad Credit" for a Mortgage?

Lenders generally look at your FICO score, which typically falls into these ranges:

  • Exceptional: 800--850
  • Very Good: 740--799
  • Good: 670--739
  • Fair: 580--669
  • Poor: 300--579

For mortgage purposes, "bad credit" usually means anything below the mid-600s --- the point where you start losing access to the best conventional rates and may need to lean on a government-backed program instead. A score in the 500s isn't shut out of homeownership, but it narrows your options and generally increases your cost of borrowing.

Can You Get a Mortgage With Bad Credit?

Yes --- in most cases. Several mortgage programs exist specifically because the housing market would shrink dramatically if only borrowers with 740+ scores could qualify. What changes with a lower score isn't just whether you're approved, but:

  • Which loan programs you're eligible for
  • How much down payment you'll need
  • What interest rate you're offered
  • Whether you'll pay mortgage insurance, and how much

Mortgage Options for Bad Credit Borrowers

FHA Loans

FHA loans are the most common path for borrowers with lower credit scores, because the Federal Housing Administration insures the loan rather than requiring the lender to absorb all the risk themselves. HUD's baseline guidelines work on a two-tier system:

  • 580 credit score or higher --- qualifies for FHA's minimum 3.5% down payment
  • 500 to 579 --- still eligible, but requires at least 10% down
  • Below 500 --- not eligible for FHA financing

Here's the catch most articles skip: those are HUD's minimums, not what most lenders actually require. Many FHA-approved lenders apply their own overlay, commonly requiring a 620--640 score even though the program technically allows 580. If you're near the floor, it's worth shopping smaller or online-focused lenders, since large retail banks are often less willing to go near HUD's actual minimum.

FHA loans also require mortgage insurance, covered in detail below --- and unlike conventional PMI, it doesn't factor in your credit score, so a 580-score borrower and a 720-score borrower pay the same MIP rate on the same loan amount.

VA Loans (For Eligible Veterans and Service Members)

If you're a veteran, active-duty service member, or eligible surviving spouse, a VA loan is worth checking before anything else. The VA itself doesn't set a minimum credit score --- lenders set their own overlays, commonly in the 580--620 range, and some go lower with strong compensating factors. VA loans also typically don't require a down payment or monthly mortgage insurance, which can make them cheaper than an FHA loan even with a lower credit score.

USDA Loans (For Eligible Rural and Suburban Areas)

USDA loans back purchases in eligible rural and some suburban areas, and like VA loans, generally don't require a down payment. USDA doesn't publish a hard credit minimum, but most lenders look for a score around 640 to use automated underwriting; below that, approval typically requires manual underwriting with stronger compensating factors. Income limits also apply, since the program is targeted at low-to-moderate-income buyers.

Conventional Loans With Compensating Factors

Conventional loans (the kind backed by Fannie Mae or Freddie Mac rather than a government agency) typically require a minimum credit score around 620. That's higher than FHA's floor, but if you're close to that threshold, a conventional loan can still make sense --- particularly if you have strong compensating factors like a larger down payment, low debt-to-income ratio, or significant cash reserves, since underwriters weigh your full financial picture rather than the score in isolation.

Non-QM and Portfolio Loans

Non-Qualified Mortgages (non-QM) are loans that don't fit Fannie Mae, Freddie Mac, FHA, VA, or USDA's standard rulebooks. They're built for borrowers with real-world financial situations that don't show up cleanly on a tax return or credit report, including:

  • Bank statement loans --- qualify using 12--24 months of bank deposits instead of tax returns, common for self-employed borrowers
  • Asset-depletion loans --- qualify using savings or investment assets rather than income
  • Recent credit event programs --- designed for borrowers with a bankruptcy, foreclosure, or short sale in the past few years

Some non-QM lenders will work with credit scores as low as the 500s, but expect trade-offs: larger down payments (often 10--25%+), higher interest rates than conventional or FHA loans, and sometimes higher fees to offset the added risk the lender is taking on. Non-QM can be a legitimate bridge while you rebuild credit, but it's rarely the cheapest long-term option --- most borrowers who go this route plan to refinance into a conventional or FHA loan once their credit and documentation improve.

Manual Underwriting

Most mortgage applications go through automated underwriting, which approves or denies a file largely based on credit score, DTI, and a handful of other data points. When your file doesn't clear automated underwriting --- often because of a low score, thin credit history, or a past credit event --- a lender may still approve you through manual underwriting, where a human underwriter reviews the full picture: payment history, reserves, employment stability, and any documented reasons behind past credit issues (job loss, medical debt, divorce). Manual underwriting takes longer and isn't offered by every lender, but it's one of the more overlooked paths for borrowers just below a program's usual cutoff.

FHA Mortgage Insurance vs. Conventional PMI

Mortgage insurance is one of the biggest cost differences between loan types, and it's often misunderstood.

FHA Mortgage Insurance Premium (MIP):

  • Upfront MIP: 1.75% of the loan amount, charged once at closing (usually financed into the loan)
  • Annual MIP: roughly 0.50%--0.55% for most 30-year loans, depending on your down payment, split into monthly payments
  • Duration: with less than 10% down, MIP lasts for the entire loan term; with 10% or more down, it typically drops off automatically after 11 years
  • Doesn't vary by credit score --- a 580-score borrower and a 740-score borrower pay the same MIP rate on an identical loan

Conventional Private Mortgage Insurance (PMI):

  • Required when your down payment is below 20%
  • Does vary by credit score --- a lower score generally means a higher PMI rate, sometimes significantly so
  • Cancels automatically once your loan balance reaches 78% of the home's original value, and you can typically request removal once you reach 80%

The practical takeaway: if your credit score is well below 680--700, FHA's flat, credit-score-independent MIP can end up cheaper than conventional PMI, even though FHA's MIP technically lasts longer. If your score is closer to the high 600s or low 700s, it's worth running both scenarios side by side, since conventional PMI at a decent score can undercut FHA over time --- especially since it eventually disappears.

How Your Credit Score Affects Your Interest Rate

Credit score doesn't just determine which loans you qualify for --- it directly affects the interest rate you're offered on conventional loans, through what's known as loan-level price adjustments (LLPAs). In simple terms: lower scores are priced as higher risk, which shows up as a higher rate or higher upfront fees, even on the exact same loan amount and property.

This is one of the clearest financial arguments for improving your score before applying, even by 20--40 points. A meaningfully lower rate on a 30-year loan can save tens of thousands of dollars over the life of the mortgage --- often far more than the time cost of waiting a few months to apply. FHA loans are less sensitive to this dynamic since MIP doesn't vary by score, but the interest rate itself can still be affected by your credit profile depending on the lender.

What to Actually Expect on Rate

There's no single "bad credit mortgage rate" --- pricing depends on the specific lender, loan program, and your full financial profile --- but the general pattern holds across nearly every lender: the further your score sits below the low-to-mid 700s, the more you should expect to pay in rate, points, or both, on any loan type where pricing is tied to credit. That includes conventional and most non-QM loans, but not FHA's mortgage insurance, which stays flat regardless of score.

A useful way to think about it: two borrowers financing the same home might see a meaningful gap in their monthly payment purely based on credit tier, even with identical income and down payment. On a 30-year loan, even a modest rate difference compounds into tens of thousands of dollars over the full term. This is why comparing your actual quoted rate across a few lenders matters more than reading a generic published "average rate" online --- published averages blend every credit tier together, not just yours.

Down Payment Requirements by Loan Type

Loan Type Minimum Credit Score (Typical) Minimum Down Payment

FHA 580 (500 with 10% down) 3.5% (10% if score is 500--579)

VA No VA minimum; lenders ~580--620 Often $0

USDA ~640 for automated approval Often $0

Conventional ~620 3--5% typical, more with lower scores

Non-QM As low as 500s at some lenders Often 10--25%+

Actual requirements vary by lender, so treat this as a starting point for comparison rather than a guarantee.

Loan Option Snapshot

Loan Type Best For Mortgage Insurance Rate Sensitivity to Credit

FHA Scores in the 500s--600s, low down payment savings Flat MIP, doesn't vary by score Moderate

VA Eligible veterans and service members None Low--moderate

USDA Eligible rural/suburban buyers, low-to-moderate income Guarantee fee (lower than FHA MIP) Moderate

Conventional Scores 620+, especially 680+ PMI varies by score, cancels at 78--80% LTV High

Non-QM Self-employed, recent credit events, larger down payment available Varies by program High, but score alone isn't disqualifying

Mortgage Preapproval With Bad Credit: What Lenders Check

Preapproval is where compensating factors matter most. A lower credit score doesn't automatically sink your application if the rest of your file is strong. Lenders typically weigh:

  • Credit score and full credit history --- not just the number, but your pattern of on-time payments, recent delinquencies, and any past bankruptcy or foreclosure
  • Debt-to-income ratio (DTI) --- how much of your income already goes toward debt payments
  • Cash reserves --- extra savings beyond your down payment and closing costs, which reassures a lender you can handle a few months of payments if something goes wrong
  • Employment and income stability --- typically two or more years in the same job or field
  • Down payment size --- a larger down payment reduces the lender's risk and can offset a lower score
  • Co-borrower or co-signer --- adding someone with stronger credit and income to the application can improve your approval odds and pricing

A low score combined with strong reserves, low debt, and stable income is viewed very differently than a low score combined with high debt and irregular income --- even though the number on the credit report might be identical.

How to Compare Lenders When You Have Bad Credit

Shopping around matters more, not less, when your credit is on the lower end, because lender overlays vary widely --- one lender's hard "no" at a 600 score can be another lender's approval. When comparing offers:

  • Ask each lender's actual minimum score for the program you want, not just the government program's published floor
  • Compare the full Loan Estimate, not just the headline rate --- origination fees, discount points, and mortgage insurance terms all affect your real cost
  • Ask specifically about manual underwriting availability if your score is borderline
  • Check whether multiple credit inquiries within a short window count as one pull --- most credit scoring models treat mortgage inquiries within a 14--45 day window as a single inquiry, so rate shopping within that window shouldn't meaningfully hurt your score

Getting quotes from at least three lenders --- including at least one FHA-focused lender and one credit union, which sometimes have more flexible overlays than large national banks --- is one of the highest-value things a bad-credit borrower can do.

Down Payment Assistance and First-Time Buyer Programs

Many state and local housing finance agencies offer down payment assistance for buyers with lower incomes or lower credit scores. Programs vary enormously by state, county, and sometimes even by city, so there's no single number to quote --- but they generally fall into a few categories:

  • Outright grants --- money that doesn't need to be repaid, often reserved for first-time or lower-income buyers
  • Forgivable second loans --- a second loan behind your mortgage that's forgiven, often gradually, if you stay in the home for a set number of years
  • Deferred-payment loans --- a second loan with no monthly payment, due when you sell, refinance, or pay off the first mortgage
  • Employer-assisted housing programs --- some employers, especially hospitals, universities, and local governments, offer down payment help to attract and retain staff in a specific area

It's worth checking your state's housing finance agency website before assuming you need to save the full down payment yourself --- many of these programs are underused simply because buyers don't know to ask.

It's also worth knowing that HUD funds a network of approved, typically free housing counseling agencies that can review your specific credit and financial situation, help you understand which programs you may qualify for, and flag issues before a lender does. This is one of the few genuinely free, unbiased resources in the entire homebuying process, since counselors aren't paid based on whether you close a loan with a particular lender.

Many down payment assistance programs also require completing a homebuyer education course before closing --- usually a few hours online or in person, covering budgeting, the closing process, and homeownership responsibilities. This isn't a formality to dread: it's often taught through the same HUD-approved counseling network, and completing one is frequently a prerequisite for the best assistance programs, not an obstacle to them.

Steps to Strengthen Your Application Before You Apply

If you're not in a rush, a few months of preparation can meaningfully change your options:

  • Pull your credit reports and dispute errors. Incorrect late payments, accounts that aren't yours, or outdated collections can drag your score down for no legitimate reason, and disputing verified errors can raise your score relatively quickly.
  • Pay down revolving balances. Credit utilization --- how much of your available credit you're using --- is one of the fastest-moving factors in your score. Getting balances below 30% of your limits, and ideally lower, tends to help within a billing cycle or two.
  • Avoid opening new credit accounts before applying. New inquiries and new accounts can temporarily lower your score and shorten your average account age.
  • Build cash reserves. Even a modest cushion beyond your down payment and closing costs strengthens your file with underwriters.
  • Consider a co-borrower. If someone you trust has stronger credit and is willing to be on the loan with you, it can open up better pricing and loan options.
  • Get current on any past-due accounts. Recent, on-time payments carry meaningful weight in most credit scoring models.

None of these are guaranteed to move your score by a specific amount --- credit scoring models weigh dozens of factors differently for each person --- but they're the levers that consistently move in the right direction.

Credit Repair Services: What to Know Before You Pay for Help

If you're considering paying a credit repair company rather than disputing errors yourself, it's worth knowing your rights under the Credit Repair Organizations Act (CROA), a federal law enforced by the FTC:

  • No upfront fees. A credit repair company legally cannot charge or collect payment until the promised service has been fully performed --- not an "enrollment fee," not a "processing fee," regardless of what it's labeled.
  • No guaranteed results. Any company promising a specific score increase or claiming it can remove accurate, timely negative information is making a claim CROA doesn't allow them to back up.
  • A written contract is required, spelling out the exact services, total cost, and your right to cancel without penalty within three business days of signing.
  • You can dispute errors yourself for free, directly with the credit bureaus, and a legitimate company is required to disclose that this option exists.

None of this means every credit repair company is a scam --- but "pay us $300 upfront and we'll fix your credit" is, by definition, breaking federal law, which is a useful filter when evaluating offers.

Refinancing Once Your Credit Improves

Buying now with a higher rate or FHA mortgage insurance isn't necessarily a permanent situation. Once your credit improves and you've built some equity, refinancing is usually on the table:

  • Rate-and-term refinance --- replacing your current mortgage with a new one at a lower rate once your credit and the market both improve, which can also let you switch from an FHA loan to a conventional loan and drop mortgage insurance entirely once you have 20% equity
  • FHA Streamline Refinance --- a simplified refinance option for existing FHA borrowers looking to lower their rate, often with reduced documentation
  • Removing PMI or MIP --- conventional PMI cancels automatically at 78% loan-to-value; FHA MIP generally requires refinancing out of the FHA loan entirely to remove it if you have less than 10% equity

This is one of the most important mental models for a bad-credit buyer: today's loan terms don't have to be permanent. Many buyers use a higher-cost loan as a bridge, then refinance into better terms once their file catches up.

How to Apply for a Mortgage With Bad Credit: Step-by-Step

  1. Check your credit reports and scores from all three bureaus before applying anywhere, and dispute any errors you find.
  2. Decide which loan program fits your situation --- FHA, VA (if eligible), USDA (if eligible), conventional, or non-QM --- based on your score, down payment savings, and timeline.
  3. Get preapproved with at least two or three lenders, including at least one that specializes in FHA or bad-credit lending.
  4. Compare full Loan Estimates, not just headline rates, across every offer.
  5. Ask about down payment assistance programs through your state or local housing finance agency.
  6. Consider a HUD-approved housing counselor if you want an independent second opinion on your options.
  7. Avoid new debt or credit inquiries between preapproval and closing.
  8. Complete underwriting, providing any additional documentation your lender requests promptly.
  9. Review your Closing Disclosure carefully before signing, comparing it to your original Loan Estimate.
  10. Close on the home, and start planning your refinance timeline if you took on a higher rate or FHA mortgage insurance to get in the door.

Pros and Cons of Buying Now With Bad Credit

Reasons buying now can make sense:

  • Home prices and rates could rise while you wait, potentially costing more than the difference in terms you'd get with a better score
  • You start building equity immediately instead of continuing to pay rent
  • FHA and other programs exist specifically to make this path viable
  • You can refinance into better terms later once your credit improves

Reasons waiting can make sense:

  • Even a modest score improvement can meaningfully lower your rate and total interest paid
  • A larger down payment saved during the waiting period reduces your loan amount and mortgage insurance costs
  • More loan programs and better pricing open up above certain score thresholds (620, 680, 740)

There's no universally correct answer --- it depends on your local market, how quickly you can realistically improve your score, and how much a delay actually costs you in your specific situation.

Common Mistakes to Avoid

  • Assuming one lender's "no" is final. Overlays vary widely --- a rejection at one lender doesn't mean rejection everywhere.
  • Only comparing interest rates. A lower rate with higher fees or worse mortgage insurance terms can cost more overall.
  • Opening new credit accounts before closing. This is one of the most common ways buyers accidentally hurt their own approval.
  • Not budgeting for mortgage insurance. FHA's MIP and conventional PMI both add real monthly cost that's easy to underestimate.
  • Skipping free resources. HUD-approved housing counseling is free and unbiased --- many buyers never use it simply because they don't know it exists.
  • Ignoring the refinance path. Some buyers avoid buying altogether while working on credit, when a bridge loan now and a refinance later might cost less overall than months of rent.
  • Paying a credit repair company upfront. This is illegal under federal law and a reliable warning sign, not just a red flag.

Frequently Asked Questions

What credit score do I need to buy a house? It depends on the loan program. FHA allows scores as low as 500 with 10% down or 580 with 3.5% down, though many lenders set their own minimum around 620--640. Conventional loans typically require around 620.

Can I get a mortgage with a 500 credit score? Potentially, through FHA with a 10% down payment or certain non-QM programs, though your options and pricing will be more limited than at higher scores.

Does my credit score affect my interest rate? Yes, especially on conventional loans, where loan-level price adjustments tied to your score directly affect your rate. FHA's mortgage insurance doesn't vary by score, but your rate still can depending on the lender.

Is an FHA loan better than a conventional loan for bad credit? Often, yes, if your score is well below 680--700, because FHA's mortgage insurance doesn't increase for lower scores the way conventional PMI does. Above that range, conventional can sometimes be cheaper, especially since PMI eventually cancels.

Can I use a co-signer to qualify for a mortgage? Yes, most loan programs allow a co-borrower or co-signer, which can improve your approval odds and pricing if that person has stronger credit and income.

How long does it take to improve a credit score enough to qualify? It varies widely, but disputing verified credit report errors can produce changes within weeks, while paying down credit card balances often shows results within one to two billing cycles. Larger score jumps, especially after a bankruptcy or foreclosure, typically take longer.

Will shopping multiple lenders hurt my credit score? Generally, no --- most scoring models treat multiple mortgage inquiries within a short window (commonly 14--45 days) as a single inquiry.

Can I get a mortgage after bankruptcy or foreclosure? Often yes, after a required waiting period that varies by loan program and the type of bankruptcy or foreclosure, sometimes sooner with documented extenuating circumstances.

What's the difference between FHA MIP and conventional PMI? FHA MIP is a flat rate that doesn't depend on your credit score and, with less than 10% down, lasts the life of the loan. Conventional PMI varies by credit score and cancels automatically once you reach 78% loan-to-value.

Do I need a 20% down payment to buy a house? No. FHA loans require as little as 3.5% down, and VA and USDA loans often require no down payment at all for eligible borrowers. Twenty percent is only required to avoid mortgage insurance on a conventional loan.

Is it better to wait and improve my credit before buying? It depends on your market and timeline. A better score can lower your rate meaningfully, but rising home prices or rates while you wait can sometimes offset those savings. Running both scenarios with a lender is the only way to know for your specific situation.

What is a non-QM loan and is it risky? A non-QM loan simply doesn't follow the standard government or Fannie Mae/Freddie Mac rulebook --- it's not inherently predatory, but it typically comes with higher rates and larger down payment requirements, so it's worth comparing carefully against FHA or conventional options first.

Is it legal for a credit repair company to charge me before doing any work? No. Under the Credit Repair Organizations Act, credit repair companies cannot legally collect payment until the promised service has been fully performed, regardless of what the fee is called.

Do down payment assistance programs require a minimum credit score? Often yes, and requirements vary by program --- some mirror the underlying loan's minimum (like FHA's 580), while others set their own floor. Your state housing finance agency or a HUD-approved counselor can confirm current requirements.

Can I qualify for a mortgage with no credit history at all, rather than bad credit? Sometimes, through manual underwriting using alternative payment history like rent, utilities, and phone bills, though not every lender offers this path.

Final Thoughts

Bad credit changes the math on buying a home, but it rarely closes the door entirely. FHA loans, VA loans for eligible veterans, and non-QM programs all exist specifically to serve borrowers who don't fit a traditional credit profile --- the real work is figuring out which option costs the least for your specific score, savings, and timeline.

The buyers who come out ahead usually aren't the ones with the highest score walking in --- they're the ones who shopped multiple lenders, understood exactly what mortgage insurance would cost them, and had a concrete plan to refinance once their file improved. Credit score matters, but it's one input among several, and it's rarely the only thing standing between you and a mortgage.

Before applying, a short checklist covers most of what actually matters:

  1. Pull your credit reports from all three bureaus and dispute any errors
  2. Identify which loan programs you likely qualify for based on your score and situation
  3. Get preapproved with at least two or three lenders, including one FHA-focused lender
  4. Ask about down payment assistance through your state's housing finance agency
  5. Compare full Loan Estimates, not just headline interest rates
  6. Consider a free HUD-approved housing counseling session for a second opinion
  7. Avoid new credit accounts or big purchases between preapproval and closing
  8. Build a plan to refinance once your credit and equity improve

This guide is intended for general information purposes only and does not constitute financial, legal, or lending advice. Rates, fees, and eligibility rules can change and may vary by lender --- confirm current details with a licensed mortgage lender before making financial decisions.