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Ways to Buy Your New Home with a Less than 650 Credit Score

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Today’s market offers an unexpectedly wide array of home financing options for those with less-than-ideal credit. It’s common for buyers to discover that they qualify for FHA and VA loans backed by the government with credit scores starting from 580. A few lenders might extend FHA loans to those with scores as low as 500, though such cases are quite uncommon.

For individuals with credit scores over 600, the pool of mortgage options widens significantly. A score of 620 is all that’s required for conventional mortgages, while scores of 680 and above potentially qualify you for nearly any type of home loan.

It’s acknowledged across the mortgage sector that the absolute minimum credit score for securing a home loan is 500. Yet, it’s crucial to understand that lenders prepared to accept this low threshold are rare, and such loans often come with higher interest rates and additional qualifications to mitigate the lending risks associated with poor credit profiles.


What do mortgage lenders consider a bad credit score?

Mortgage lenders may differ in their definition of a bad credit score, but generally, scores below 580 are categorized as “poor” or “bad” according to the FICO scoring model. For those seeking a mortgage with a credit score under 620, it may be labeled as a “low credit mortgage.”

FICO credit score ranges:

FICO Credit Score Ranges

FICO Credit Score Ranges

FICO Credit Score RangesRatingDescription
<580PoorBelow the average score of U.S. consumers and demonstrates to lenders that the borrower may be a risk.
580-669FairBelow the average score of U.S. consumers, though many lenders will approve loans with this score.
670-739GoodNear or slightly above the average of U.S. consumers and most lenders consider this a good score.
740-799Very GoodAbove the average of U.S. consumers and demonstrates to lenders that the borrower is very dependable.
800+ExceptionalAbove the average score of U.S. consumers and clearly demonstrates to lenders that the borrower is an exceptionally low risk.
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OK, so what are my loan options?

The optimal mortgage for your needs will offer flexible qualification criteria and ensure that you can easily manage your monthly mortgage payments. It’s essential to thoroughly compare loan terms and interest rates with your loan officer to determine which program aligns best with your circumstances. What makes these programs particularly beneficial is their varying requirements and credit score minimums, providing options to suit a range of financial situations.

FHA loan | Minimum FICO Credit Score: 500

FHA loans, guaranteed by the Federal Housing Administration, stand out as the most accessible mortgage option for individuals with less-than-perfect credit. Among all the major home loan programs, FHA loans boast the lowest requirements for credit scores. Lenders commonly offer these loans to applicants with scores starting at 580, allowing for a minimal down payment of just 3.5%.

Applicants with credit scores in the range of 500 to 579 aren’t excluded from qualifying for an FHA loan; however, they’re required to make a larger down payment of at least 10%, and locating a lender who agrees might be more challenging.

One of the attractive features of FHA loans for those with credit challenges is their absence of risk-based pricing, unlike their conventional counterparts. These adjustments, known as loan-level pricing adjustments (LLPAs), typically add fees to loans associated with lower credit scores or other risk factors.

While borrowers with lower credit scores may face higher interest rates, the increases are generally much less severe with FHA loans compared to conventional mortgages. It’s important to note, though, that FHA loans come with their own costs, including both upfront and annual mortgage insurance premiums, which contribute to the total expense of the loan.

Verify Your FHA Loan Eligibility

VA Loan | Minimum FICO Credit Score: None

VA loans are a favored option among veterans, active military personnel, and certain qualified spouses, backed by the Department of Veterans Affairs. These loans accommodate borrowers of all credit types without necessitating a down payment or the payment of ongoing mortgage insurance.

While the VA itself does not impose a minimum credit score for eligibility, individual lenders often do, with a 620 FICO score being a common threshold for financing approval.

Eligibility for a VA loan requires that either you or your spouse satisfy the Department of Veterans Affairs specified service criteria and possess an authentic Certificate of Eligibility (COE). Additionally, to secure a loan backed by the VA, borrowers must also fulfill the specific credit and income criteria set by their lender.

There are several benefits to a VA Loan that make it one of the most enticing loan products regardless of your credit score or income.

  • No Down Payment Required
  • No Private Mortgage Insurance
  • Very Competitive Interest Rates
  • Limited Closing Cost
  • No Maximum Loan Limits
  • Relaxed Credit Requirements
  • Lifetime Benefit of VA Loans for Primary Residence
  • Ability to have two separate VA Loans using Second-Tier Entitlement

Verify Your VA Loan Eligibility


USDA Loan | Minimum FICO Credit Score: 640

USDA loans are highly sought after due to their no down payment requirement and attractive interest rates. While the USDA itself doesn’t mandate a specific credit score, lenders typically look for a minimum of 640 to automatically qualify under the USDA’s Guaranteed Underwriting System (GUS).

These loans, supported by the U.S. Department of Agriculture, aim to boost homeownership in less densely populated areas. For eligibility, the property you intend to purchase must be situated in an area deemed rural by the USDA, though certain suburban locations are also eligible.

However, there are income limits to consider. To qualify for a USDA loan, your household income cannot exceed 115 percent of the median income for your region.

Verify Your USDA Loan Eligibility

Fannie Mae HomeReady | Minimum FICO Credit Score: 620

Launched in December 2015, the HomeReady program by Fannie Mae is a pivotal initiative designed for borrowers with low to moderate incomes, aiming to broaden access to financing for homes in economically disadvantaged areas.

This program targets individuals in lower-income brackets, providing benefits such as a $2,500 credit for those with very low incomes, the ability to finance up to 97% of the home’s value, and the flexibility to use various sources for funding. HomeReady is committed to making homeownership more achievable and affordable, without the necessity for applicants to be purchasing their first home. The initiative also simplifies the lending process for financial institutions via the Desktop Underwriter (DU) system and encourages responsible borrowing by promoting educational resources for prospective homeowners.

Participants in the HomeReady program can take advantage of minimal down payment requirements, diverse financing avenues, and competitively priced mortgage insurance. The emphasis on education, including the Fannie Mae HomeView program and incentives for completing housing counseling, underscores the commitment to informed and sustainable homeownership.

Additionally, the HomeReady program is inclusive of multi-unit properties, supporting loans for 2- to 4-unit homes with Loan-to-Value (LTV) ratios as high as 95% under certain conditions and providing the option for manual underwriting. For purchases with LTV ratios above 80%, a minimal down payment of 3% is required, although this stipulation is waived for LTV ratios of 80% or below. Importantly, rental income from these properties can be considered in the loan qualification process, reinforcing the program’s dedication to accessible and responsible homeownership financing.

Verify Your Fannie Mae HomeReady Eligibility


Freddie Mac Home Possible | Minimum FICO Credit Score: 660

Launched in 2014, Freddie Mac’s Home Possible program supports low to moderate-income homebuyers by offering key benefits such as low down payments, the option to cancel mortgage insurance, and flexible criteria for credit scores and debt-to-income (DTI) ratios. Eligibility requires a minimum 3% down payment, a 620 credit score, income not exceeding 80% of the local median, and the purchase of a primary residence.

Designed to assist lower-wage earners and first-time buyers—defined as those not owning a home in the past three years—Home Possible provides advantages like reduced down payments, diverse sources for down payments, manual underwriting options, and lower fees. Qualified borrowers may also be eligible for a loan level price adjustment (LLPA) credit of up to 1% of the loan amount, with a maximum of $3,500.

However, the program has its limitations, including income restrictions and a focus on primary residences, excluding secondary homes and investment properties. Home Possible encourages homeownership in underserved areas by allowing for the purchase of 2- to 4-unit properties, offering a range of mortgage products to meet the needs of diverse borrowers. This initiative aims to promote sustainable homeownership and community development by including rental income for qualification and providing flexible underwriting standards.

Verify Your Fannie Mae Home Possible Eligibility

Non-qualified mortgage (Non-QM) | Minimum FICO Credit Score: 500

The Qualified Mortgage (QM) Rule, activated in 2014 by the federal government, aimed to secure the lending market by curbing high-risk mortgage options. This led to the necessity for most borrowers to meet certain criteria, including a credit score in the 600s, a down payment, and private mortgage insurance.

An alternative exists in “non-QM” loans, known for their relaxed standards. Unlike standard mortgages, banks do not sell these loans to investors, granting them the freedom to establish less stringent lending criteria, such as lower credit scores.

Securing a non-QM loan could be possible with credit scores starting at 500, though approvals are more likely for scores of 580 or above, mirroring FHA loan guidelines. However, non-QM loans typically come with higher interest rates than their conforming counterparts, suggesting that waiting to improve one’s credit score before buying could be financially prudent.

For those considering non-QM loans, exploring specialty mortgage programs offered by banks and credit unions that are not conventional nor government-supported could be beneficial. Consulting with a mortgage broker might also unveil a variety of lending products suitable for diverse financial situations, especially for borrowers looking into non-traditional loan options.

If you’re interested in a non-QM loan, there are several places you can turn to. Start by determining your eligibility — typically, you’ll need a minimum credit score of 620, a stable income, and a consistent employment history.


How much will a bad credit score cost you?

Grasping the economic consequences of poor credit can be revealing, particularly in the realm of obtaining a mortgage. Typically, a lower credit score results in a higher interest rate, impacting your monthly installments and the cumulative interest paid throughout the loan’s duration.

To illustrate, consider a $300,000 30-year fixed-rate mortgage with a 20% down payment ($60,000). Presented below is a comparison illustrating various FICO score brackets and their assumed interest rates, including the respective monthly mortgage payments and total interest costs over a 30-year period.

FICO Scores and Mortgage Information

FICO Scores and Mortgage Information

FICO ScoreInterest RateMonthly Mortgage PaymentTotal Interest Paid
800-850 (Excellent)6.5%$1,514$245,032
740-799 (Good)7.0%$1,598$275,369
670-739 (Fair)7.5%$1,678$303,380
580-669 (Low)8.0%$1,761$333,641
300-579 (Bad)8.5%$1,845$364,813

Note: These are hypothetical rates and payments for illustration purposes. Actual rates can vary based on a variety of factors including lender policies, market conditions, and economic indicators.

The table clearly demonstrates that a FICO score within the “Excellent” range of 800-850 can obtain a 6.5% interest rate, which equates to a monthly mortgage payment of $1,514 and a cumulative interest cost of $245,032 across 30 years. Conversely, a “Bad” credit score between 300-579 may result in an 8.5% interest rate, leading to a higher monthly payment of $1,845 and a total interest charge of $364,813 over the loan’s duration.

The gap in total interest expenses between the “Excellent” and “Bad” credit scores in this scenario is a remarkable $119,781 over 30 years. This stark contrast underscores the significant financial impact of possessing a low credit score on the overall cost of financing a home in the long run.


Boosting Your Odds for a Home Loan Approval with Poor Credit

Lower Your Debt-to-Income Ratio (DTI): Mortgage providers assess your DTI to determine if you can manage the proposed mortgage payments. Lowering or eliminating existing debt can simplify the qualification process for a home loan.

Challenge Negative Credit Report Entries: Proactively address and contest inaccuracies or negative items on your credit report to potentially enhance your credit standing.

Showcase Consistent Income: Presenting evidence of stable income over the last two years or more, through W-2s or tax returns, can make your application appear less risky. A substantial savings account balance also contributes positively.

Enhance Your Down Payment: Offering a down payment that exceeds the required minimum can solidify your loan application, demonstrating a higher personal investment in the property.

Opt for More Affordable Housing Options: Selecting a property within your financial comfort zone improves your chances of loan approval. As your financial situation and credit score improve, consider upgrading your home in the future.


Quick Summary:

The right loan program for you depends not just on your credit score but also on your credit history, income, employment, and savings. Your loan officer will help you compare these options and determine which bad credit home loan is the best option for you.

Loan Types and Requirements

Loan Types and Requirements

Loan TypeMinimum Credit ScoreDown Payment
FHA loan500 (10% down)
580 (3.5% down)
3% to 10%
VA loan580-6200% down
USDA loan6400% down
HomeReady loan6203% down
Home Possible loan6603% down
Non-QM loan500-580down payment varies

Remember, mortgage underwriters will look at your full financial life — not just your credit score — when you apply for a home loan. If your credit is low but the rest of your financial picture looks good, you’re more likely to get approved.



Which mortgage companies consider applicants with poor credit?

Mortgage lender attitudes towards applications can vary significantly, making it crucial for those with poor credit to explore multiple options. Many online lenders now cater to applicants with lower credit scores, offering more flexibility. Ensure any lender you consider is licensed through the Nationwide Mortgage Licensing System (NMLS).

Is obtaining a home loan possible with a 500 credit score?

Securing a home loan with a credit score of 500, while challenging, is not impossible. FHA loans and some non-QM conventional loans may accept applicants with scores as low as 500, though options will be limited and likely require a higher down payment and lower debt levels relative to income.

Should I improve my credit score before purchasing property?

Highly recommended; however, not completely necessary. Deciding to enhance your credit score before entering the real estate market is a personal decision. While better credit can lead to significant savings over time, the appreciating nature of real estate means buying sooner could also be financially advantageous, despite the higher costs associated with poor credit.

Can a cosigner improve my loan approval chances?

Yes. A cosigner with a strong credit history can offset the perceived risk of your lower credit score or past payment issues, potentially leading to better loan terms. It’s important for both parties to understand the cosigner assumes full responsibility for the debt as well.

Do mortgages for bad credit come with higher closing costs?

Typically, yes. Bad credit is often seen as higher risk, prompting lenders to charge additional fees to mitigate this risk. Reviewing loan terms carefully and consulting with your lender about potential extra costs is advisable. Shopping around can also uncover more favorable terms from different lenders.

Will bad credit increase my mortgage insurance costs?

Your credit score impacts your mortgage insurance premiums; lower scores can lead to higher costs due to the increased risk of default perceived by insurers. This may also influence the required down payment. Examining all your options and consulting with a financial advisor or lender for personalized advice is beneficial.

How are lenders able to provide mortgages to applicants with bad credit?

Mortgages differ from unsecured loans by being backed by your home’s value, offering lenders a form of security. Government-backed loans like FHA, VA, and USDA loans offer further protection, enabling lending to individuals with credit scores considered subprime by many lenders.

How does bankruptcy or foreclosure impact home loan qualification?

Bankruptcy or foreclosure can significantly hinder your ability to qualify for a home loan, marking you as a higher-risk applicant. Improving your credit score, reducing your debt-to-income ratio, or increasing your down payment might be necessary to secure a mortgage under these circumstances.

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