Buying a home with a low credit score isn't impossible. Several mortgage options are designed to help people with poor or fair credit become homeowners.
While taking advantage of these programs can help you buy a house sooner, you’ll often have to pay a higher interest rate and more fees. In some cases, you may also need to provide a larger down payment.
Several different types of loans are available if your credit score is below average, meaning a FICO score between 580 and 669. Make sure to check the eligibility requirements of each one to find the best fit for your unique financial situation.
Minimum credit score: 620 to 660
Two types of conventional mortgages help people become homeowners regardless of credit score or income:
Keep in mind that you'll have to pay your lender private mortgage insurance (PMI) if your down payment is less than 20% of the home’s purchase price.
Minimum credit score: 500 to 580
An FHA loan is a type of private mortgage that’s guaranteed by the Federal Housing Administration. It has one of the lowest credit score requirements. You can qualify for a 3.5% down payment on the home purchase price if your credit score is at least 580.
It's still possible to qualify with a credit score as low as 500, but you'll need to provide at least a 10% down payment. FHA loans require an upfront and ongoing mortgage insurance premium, which adds to the cost of this low-credit home loan.
Keep in mind that all FHA loans require both an upfront and annual mortgage insurance premium (MIP) of 1.75% regardless of the amount of down payment you provide.
Minimum credit score: Varies by lender
A VA loan is a government-backed loan that’s specifically intended for veterans, service members and eligible surviving spouses. One of the unique features of a VA loan is that there’s no down payment required and it comes with flexible credit requirements. In fact, there’s no minimum credit score requirement to qualify for a VA loan.
Unlike other low-down payment loan options, there's no private mortgage insurance required. While private lenders administer VA loans, you'll need to get a Certificate of Eligibility that shows you or your spouse have met the service requirements for eligibility.
For VA loans, you’ll pay a funding fee in addition to closing costs. The amount you’ll pay depends on your loan amount, down payment and the type of loan you borrow. This fee is a one-time payment that offsets the need for down payments and mortgage insurance.
Minimum credit score: 640
The Department of Agriculture offers zero-down payment home loans for buyers seeking to purchase in a rural area. The minimum credit score requirement is just 640. There are, however, a few restrictive eligibility requirements.
First, there are income limits based on geographic location and family size. The home you're buying must be in a designated rural area. You can use the USDA's address look-up tool to see what areas near you qualify.
Minimum credit score: Varies by lender
Qualified mortgage loans have specific legal guidelines to discourage risky borrowing, such as strict debt-to-income (DTI) requirements and loan terms capped at 30 years. These types of loans use traditional means of income verification — such as tax returns, pay stubs and W-2s — to evaluate your eligibility for a loan.
A non-qualified mortgage is any loan that doesn’t meet all of the criteria of a qualified mortgage. These loans can be a good fit for borrowers who are self-employed or have fluctuating monthly incomes, as they use alternative methods of income verification when approving your loan, such as reviewing your bank statements rather than W-2s or pay stubs.
These types of mortgages are intended to help borrowers who are unable to lock in a traditional mortgage due to their employment, income or credit score. This means you may be able to qualify for a non-traditional mortgage even if you’ve experienced an event that might be dragging down your credit, such as foreclosure or bankruptcy. Additionally, you can qualify for a non-traditional mortgage even if your DTI ratio is above the standard 43% threshold.
Credible lets you compare mortgage options from multiple lenders. Find a great loan that fits your needs.
Your credit score isn't the only factor mortgage lenders consider when evaluating your loan application. Here are several factors lenders consider when determining if you qualify for a mortgage:
The following terms don’t affect your eligibility but are important to know when shopping around for a mortgage:
Here are the advantages of purchasing a home with a low credit score:
There are, of course, some disadvantages to consider as well when buying a home with a lower credit score.
If your homebuying timeline allows, you may want to take the time to build your credit before submitting a loan application. Here are a few ways to improve your credit:
If you’re considering buying a home, it’s important to shop around and compare multiple lenders. Credible makes this easy — you can compare loan options with our partner lenders in as little as three minutes.
