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Mortgage Options for People with Bad Credit

When your credit score is low, your borrowing options are limited. But there is hope for your homebuying dream. Don’t get overwhelmed. There are programs available and people willing to help you.
October 11, 2021 | 5 minute read

How Can I Get Approved for a Loan With Bad Credit?

A great time to apply for a home loan is when interest rates are low. However, many borrowers feel that there is an “if” involved in that statement: A great time to apply for a home loan is when interest rates are low if you have a good to excellent credit score.

So what’s a borrower with a bad credit score to do?

There are still opportunities and options to act while interest rates are low for borrowers with bad credit. Keep in mind: a lower prime lending rate affects all loan types. So while you might not get the best terms, you are likely to get a better rate than you might get at another time.

Are There Mortgage Loans for Bad Credit?

The federal government has multiple loan options, such as an FHA loan, VA loan or USDA loan available to homebuyers with low credit scores. Sometimes there are also local and state grants or programs available. 

Understand your credit history before applying for a home loan, even if you have a great score. Secure free credit reports so that there are no surprises when you meet with your loan officer and start the application process. 

A local, personal loan officer will be your best source to discover your options in your area and how you might qualify. In addition to helping you determine the root of your bad credit, loan officers can work with you to find your best options. (For instance, holding balances on too many credit cards can lead to “bad credit.”) 

In some cases, a higher down payment can help you offset a poor credit score. 

Beyond seeking out other loan options, the best thing an aspiring homebuyer with a low credit score can do is raise their credit score. Raising your credit score is achievable and doesn’t take years to overcome. You can accomplish many of the techniques quickly without spending a dime.

Odd as it sounds, the lower your credit score, the easier it is to improve it. In fact, when you begin with a low credit score, increasing it by 100 points isn’t an unrealistic expectation.

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FHA Loans for Bad Credit

When your credit score is low, your borrowing options are limited but not obsolete. For homebuyers with low credit scores, hope typically begins with the Federal Housing Administration.

FHA loans come with standards that are easier to meet than conventional loans. In some cases, the interest rates can be lower than conventional loans. 

Why? Because the government wants to remove obstacles to homeownership. It’s good for you, it’s good for neighborhoods to have invested homeowners, and it’s good for state and federal tax collection.

However, not everyone can qualify for an FHA loan. Minimum credit thresholds must still be met, so multiple delinquencies to your credit score must be cleaned up before you can qualify. Still, the requirements for an FHA loan are much more friendly and more forgiving of past financial issues.

VA Loans for Bad Credit

If you are an active or former military member or the spouse of a deceased military member, you likely qualify for a VA loan. This puts you in a powerful home-buying position.

VA loans are a fantastic opportunity for service members and their spouses. For starters, there is no requirement for a down payment. A VA loan can also come with a decent interest rate, especially for a buyer with a low credit score.

USDA Loans for Bad Credit

A USDA loan can be used to purchase a home in a designated rural area. The home does not need to be a farm, nor do you have to be a farmer or work in agriculture. The requirements for a USDA loan involve your credit score, your income, your U.S. citizenship status, the condition of the home, and the location of the home you hope to buy.

An advantage of the USDA loan is that it does not require a down payment!

The Downside of Bad Credit Mortgage Loans

Even though an FHA loan can offer an interest rate lower than a conventional loan, an FHA isn’t always a borrower’s best option.

Among the requirements of an FHA loan is an Upfront Mortgage Insurance Premium. This is an amount equal to 1.75% of the FHA loan amount. So, for a $250,000 home, the Upfront Mortgage Insurance Premium is $4,375.

In addition to that fee, borrowers must also pay a monthly mortgage insurance premium. This amount will depend on the loan amount. Depending on the mortgage terms, these premiums can sometimes be reduced, refunded or canceled. 

It’s also conceivable that refinancing the FHA home loan in the future could remove the monthly premiums. The best way to navigate these scenarios is with the help and guidance of a personal loan officer.

What Mortgage Lenders Will Work With Bad Credit?

Little about home mortgages is obvious, clear, or easy to understand for homebuyers, especially when beginning the journey with a low credit score. 

Don’t get overwhelmed. There are programs available and people willing to help you. Start by connecting with a local, personal loan officer. They can outline the steps you need to take, the options you should explore, find lenders willing to work with you, and be by your side to identify all of the opportunities you have to own a home. 

With a personal loan officer on your side, you, too, will be able to capitalize on your home-buying experience.

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