The higher your credit score, the easier it is to get a mortgage. But what happens if your credit isn’t great? While getting a mortgage with a low score is tricky, it’s not impossible. Here are some options.
Credit scores usually range from 300 to 850. Higher scores are more favorable since they represent a lower risk to lenders. Here’s how FICO (the most widely used scoring model) rates different scores:
| Credit score range | Score rating |
|---|---|
| 800+ | Exceptional |
| 740 to 799 | Very good |
| 670 to 739 | Good |
| 580 to 669 | Fair |
| < 579 | Poor |
There’s no universal minimum score that automatically prevents you from getting a mortgage. However, the lower your score, the harder it can be to get a loan. Different types of mortgage loans can make it easier to qualify with a low credit score (or a low down payment), including:
- Conventional loans: You generally need a score of 620 or higher to get a conventional loan (one not insured or guaranteed by the government). However, a lender might accept a lower score if you have a large down payment or your income is high relative to the loan size.
- FHA loans: The Federal Housing Administration (FHA) helps make it easier for homebuyers to get mortgages. You can qualify for an FHA loan with a minimum credit score of 580 if you put 3.5% down. With at least 10% down, your credit score can be as low as 500.
- VA loans: VA loans are guaranteed by the U.S. Department of Veterans Affairs. Eligible active-duty military members and veterans with a credit score of at least 580 may qualify for loans, potentially with 0% down.
- USDA loans: Backed by the U.S. Department of Agriculture, these loans help borrowers with lower incomes and credit scores buy homes in rural areas. While most lenders require a minimum credit score of 640, it’s possible to qualify with a lower score.
Lenders check your credit score to determine if you qualify for a mortgage — and the interest rate they’ll charge if you do. (Lenders consider other factors, too, like your income, debt, and how much you have saved for a down payment.) Not surprisingly, borrowers with higher credit scores enjoy better mortgage rates, lower monthly payments, and substantially lower interest costs over the life of the loan.
Here’s an example showing how FICO scores affect a $300,000, 30-year loan (interest rates are current as of Dec. 21, 2022):
| FICO score | APR | Monthly payment | Total interest paid |
|---|---|---|---|
| 760 to 850 | 6.02% | $1,802 | $348,695 |
| 700 to 759 | 6.24% | $1,845 | $364,202 |
| 680 to 699 | 6.42% | $1,880 | $376,678 |
| 660 to 679 | 6.63% | $1,922 | $391,893 |
| 640 to 659 | 7.06% | $2,008 | $422,884 |
| 620 to 639 | 7.61% | $2,119 | $463,006 |
Source: myFICO loan savings calculator
Getting a mortgage can cost more if your credit isn’t great. Still, it might be worth it if it allows you to stop paying rent — and start building equity. Here are tips for getting the financing you need if you have bad credit:
- Shop around: No matter your credit score or financial situation, it pays to shop around. You may find a better deal by getting quotes from at least three lenders.
- Consider other lenders: National banks aren’t your only option for getting a mortgage. An online lender, credit union, or local community bank might present a better offer.
- Research down payment assistance: A larger down payment might help offset a less-than-perfect credit score. Ask your lender about down payment assistance programs or Google “down payment assistance grants in [your state, county, or city]” to learn about options.
- Get help from a mortgage broker: They will try to match you with lenders based on your credit score.
- Ask someone with strong credit to cosign the loan: A cosigner can make it easier to qualify for a mortgage. But keep in mind that the cosigner is taking a big financial risk. Be realistic about how much house you can comfortably afford.
Bad credit may not keep you from getting a mortgage, but it increases the costs of buying a home. Still, there are times when you might opt to buy a home even if your credit is less than ideal.
For example, say your credit score is low because you have a limited credit history or a past disaster hurt your credit — but you’re financially stable now. In either case, buying a home may be a reasonable choice if you’re financially ready for the commitment, even if you pay more for the loan. As a homeowner, you can build equity and potentially refinance to a lower rate once your credit improves (making your monthly mortgage payments on time will help).
On the other hand, it’s never a good idea to buy a home if your credit score is low because you’re struggling financially. The added burden of a mortgage (and the costs that go along with it) could push you over the financial edge. It might make more sense to delay homeownership until you can improve your financial situation and credit score.
A low credit score can make it hard to qualify for a mortgage or get a loan with the terms you want. While there’s no easy button for improving your credit score, these steps can help:
- Review your credit score:Find out what’s on your credit report so you know where you stand and can fix any errors negatively affecting your score. You can request a free report at AnnualCreditReport.com every 12 months from each of the three major consumer reporting agencies.
- Pay your bills on time, every time: Consider setting up reminder alerts and automatic payments to help you stay on track. Make at least the minimum payment on credit accounts to keep them in good standing. If possible, pay off your balances in full each month to build better credit and avoid finance charges.
- Catch up on overdue bills: If you’re struggling to pay your bills, ask your lenders about a payment plan or other options to help you get back on track.
- Keep some of your credit available: Credit scores consider how close you are to maxing out your credit accounts. Experts generally advise using no more than 10% to 30% of your available credit.
- Don’t open new accounts too rapidly: Your score will take a hit if you open too many new accounts in a short time.
- Consider a secured credit card: These cards function like traditional credit cards, but you make a cash deposit upfront that serves as your credit limit.
- Keep up the great work: Credit scores are based on your financial habits over time. According to the Consumer Financial Protection Bureau, the longer you have credit and pay on time, the more information there is to show you’re a good credit risk.