People with poor credit worry about the lack of options out there for them to buy a house. Fortunately, there are home loan options out there that accept credit scores as low as 580, like FHA and VA loans. There are even lenders that accept a 500 credit score, though it's rare, and you'll have to put more down. If your score is above 600, you have a more comprehensive range of loans available. If it's above 680, nearly all home loans are an option.

What do mortgage lenders consider a bad credit score?

What lenders consider a "bad" score varies depending on who you work with, but the FICO model considers anything under 580 as a poor credit score. Here are their rankings:

·   Below 580: Bad credit

·   580 to 669: Fair credit

·   670 to 739: Good credit

·   740 or above: Excellent credit

It's not impossible to receive a home loan with a bad credit score as loan options are available.

Seven mortgage loans for borrowers with bad credit

The best mortgage for should ideally provide flexible eligibility requirements and allow you to afford your monthly payment without feeling financially strained. These seven loan programs can help aspiring homeowners with poor credit achieve their homeownership goals.

1. FHA loan: 500 credit score minimum

FHA loans have the most lenient credit score requirements in the market. Since they are government-backed by the Federal Housing Administration, lenders can be more flexible in their application standards. To qualify for a loan where you put only 3.5% down, you have to have a 580 credit score. If your score is between 500-579, you can still qualify, but you'll have to put 10% down on the house.

Though the interest rates might be higher for those with lower credit scores, they won't be nearly as much as a lender would charge for a conventional loan if you had a poor score.

2. VA loan: 580-620 credit score minimum

If you are a veteran or an active military member, this might be the loan for you. Perks include zero down payment, no monthly mortgage insurance (which can save you a lot of money per month), and the seller can pay most or all of your closing costs. VA loans are also more flexible on debt-to-income ratio and okay with lower credit scores.

To qualify, you must have US military service experience that includes:

·   If currently an active duty member, 90+ days in wartime or 181+ days in peacetime

·   If a veteran, you must have served either 24 months, the full period you were ordered to serve, or six years if service was in the Reserves or National Guard

Though there is no minimum credit score for these loans, many lenders that distribute the loans will require at least a 580, if not a 620, credit score.

3. USDA home loan: 620 credit score minimum

USDA loans let people buy homes without putting a cent down on the house and are available for people looking to purchase property in USDA-designated rural areas. See the USDA's property eligibility map to review eligible areas. Some suburbs are included.

It has served as a great home loan option for low-income families as you can purchase property with very little or nothing down and at a low-interest rate. A credit score of 640 is usually required for this loan, though the minimum score can vary between lenders.

There are two types of USDA loans. The first is the Guaranteed Program, for buyers who earn up to 115% of the local Area Median Income (AMI). The Direct Program is for people with incomes between 50% to 80% of the area median income, and the borrower must directly work with the US Department of Agriculture.

4. Conventional loans: 620 credit score minimum

Standard mortgage loans that the government doesn't back have higher credit score requirements and penalize people with lower credit scores with higher rates and fees.

Freddie Mac and Fannie Mae, two mortgage giants that administer the majority of conventional loans in the United States, charge something called loan-level price adjustments, otherwise known as LLPAs. They are based on two factors:

·   Your Credit score

·   Loan-to-value: The ratio between the home's value and the loan amount.

Your fee increases as your LTV rises and your credit score falls, which can also mean higher interest rates.

For the most part, lenders will require a 620 or above credit score to obtain a conventional loan.

5. Fannie Mae HomeReady: 620 credit score minimum

Founded in 2015, this flexible program is reserved for low- to moderate-income prospective homeowners. These loans only require 3% down and a minimum credit score of 620. You can also add a roommate or a renter to your loan application to increase your chances of being qualified. This program is not solely reserved for first-time home purchasers, unlike the Home Possible program by Freddie Mac.

6. Freddie Mac Home Possible: 660 credit score minimum

This program is offered to first-time home buyers. It requires a low down payment of 3% and good credit. It also allows borrowers to use down payment assistance programs to help with the home's upfront costs.

7. Non-qualified mortgage (Non-QM): 500-580 credit score minimum

In 2014, The federal government enacted the qualified mortgage rule, otherwise known as the QM Rule, which aims to create less risky loans through limiting higher-risk mortgage products. This is a huge reason why many lenders require at least a 600 credit score, significant down payments, and private mortgage insurance.

However, exceptions to this rule with more flexibility exist today. For example, when banks don't sell mortgages to investors, they can set their own requirements, such as lower credit score requirements. So there are loans out there that will accept a low credit score like 500, but they are harder to find. You are much more likely to be accepted for an FHA loan if your credit score exceeds 580.

These non-QM loans often come with sky-high interest rates. If you're interested, research specialty home loan programs that credit unions or banks offer that aren't government-insured or standard loans. Or talk to a mortgage broker.

Tips for improving your credit report before buying a home

Bad credit doesn't take purchasing a home off the table but makes it more difficult. It might be a smart idea to work on improving your credit score before trying to purchase a house. You will have more loan options with lower interest rates, down payments, and fees. Here are some tips to get started:

·   Lower credit utilization: This is your credit card limit compared to your balance. Pay down your credit card and personal loan debt, simultaneously improving your credit utilization and debt-to-income ratios. The less debt you have, the better.

·   Pay your debt regularly and on time: Avoid any late or missed payments, which are sure to decrease your credit score.

·   Get a free credit report to ensure accuracy: Sometimes, mistakes are made by credit bureaus (Transunion, Experian, and Equifax) or your creditors. It's good practice to check your report regularly so that everything is accurate and up to date.

·   If you find something's amiss, dispute it: if you find inaccurate information on your report, make sure to file a claim and get it sorted out.

·   Remove any co-borrowing accounts from your record: If you're an authorized user on someone's credit card or are a co-borrower for a loan, and the accounts have either defaulted or have defaulted, it will surely decrease your credit score. Cut the ties and remove your names from these accounts to raise your score.

Ensuring there isn't any inaccurate information is a quick solution to better credit. It's creating healthy credit habits that take longer. But, it's worth it in the end if it means you can buy a house.

Improving your mortgage approval odds even with bad credit

A low credit score limits your loan options and weakens your loan application. However, there are still other factors of the application that you can strengthen:

·   Your Debt-to-Income Ratio, or DTI: Lenders compare the monthly gross income to your monthly debts to come up with your DTI. The less debt you have, the better your application looks. Work on paying off some debt to strengthen your chances of qualifying.

·   Down payment: If you're willing to put more money down than the lender's minimum requirement, you are more likely to be eligible for a loan.

·   Cash flow: Lenders like to see steady income for at least the last two years or more. This makes you look more reliable since you regularly have money that can cover your loan payments. If you have savings in the bank, that looks even better.

·   Your home selection: Lenders are more willing to provide loans to applicants who choose a financially sensible home as opposed to one that would be difficult to pay for with your current income.

Long story short, multiple factors are considered in a loan application – not just your credit score alone.

Plan B: Improve your credit score and then refinance

If you discover issues with your credit after you've applied for a home loan, you have the option to refinance the mortgage at a later rate once you've improved your credit score.

Bad credit home loans FAQs

What mortgage companies work with people who have bad credit?

No one company works with people with bad credit scores – it varies from application to application. Shop around and talk to multiple lenders to understand your options. Online mortgage companies are more flexible for people with bad credit – just make sure they're licensed by the Nationwide Mortgage Licensing System or the NMLS.

Am I eligible for a mortgage with a 500 credit score?

There are FHA loans available to people with a 500 credit score, but you have to find the right lender. Some non-QM conventional lenders may be available. Your options will be more limited if your score is this low.

I have a credit score of 500. Can I qualify for a home equity loan?

It's an unlikely scenario. Most lenders require at least a 600 credit score for these types of loans unless you have a low debt-to-income ratio and a high amount of equity.

Can a cosigner help me qualify for a home loan?

Yes, a cosigner may help if the lender wants to average your scores. However, often, lenders only consider the lowest of the two scores. So just make sure you work with the right lender who is more flexible.

Will having bad credit require more closing costs?

Not necessarily. However, bad credit significantly limits your loan options, so the odds are that it will increase your costs because you aren't able to shop around as much as if you had better credit.

Does bad credit affect how much mortgage insurance costs?

For conventional loans, yes. For FHA loans, no, but it can affect how much is required for a downpayment.

Should I improve my credit score before investing in real estate?

This decision is up to you as it's a personal choice. Improving your score can save money and significantly increase your loan approval odds. But if you think investing in real estate now, before improving your score, is right for you, then it's worth pursuing. Unless your credit score is very, very low, then it is wise to work on improving your score before purchasing a home.

Does bankruptcy affect your loan approval odds?

Yes, it can. Foreclosures or bankruptcies can make your loan application look riskier, so it is wise to strengthen other factors of your loan application if you have this on your record.