Can you get a mortgage with bad credit?

A good to excellent credit score can significantly impact your ability to secure a lower mortgage rate. However, for the approximately 28% of Americans who do not meet this credit threshold, the question arises: can you still get a mortgage with bad credit?

The answer is yes, it is possible to get a mortgage and buy a house with bad credit, or even a terrible credit score. While your options may be more limited and there are potential downsides to consider, there are steps you can take to increase your chances of approval.

Mortgage lenders typically do not use terms like “bad” or “terrible” credit. Instead, they rely on the language of the two major credit score models: FICO and VantageScore. According to FICO, a credit score ranging from 580 to 669 is considered fair, while anything below 580 is deemed poor. VantageScore categorizes credit scores from 601 to 660 as near-prime and anything below 600 as subprime, which could result in a denied loan application.

When it comes to applying for a mortgage with a lower credit score, it may require more effort to find a loan program with competitive interest rates. “If you plan on buying a house as a primary residence, lenders have specialized programs to help you build credit while applying for the loan,” said Yuval Golan, founder and CEO of the real estate financing platform Waltz. “Depending on where you live, there are also state-sponsored programs with incentives for first-time home buyers that can reduce barriers for those with bad credit.”

In addition to your credit score, mortgage lenders consider other factors when determining your eligibility for a loan. These factors include your down payment amount, stable income, and low outstanding debt. A sizeable down payment can signal to lenders that you are a lower-risk borrower and may result in a lower monthly mortgage payment and less interest paid over the life of the loan.

If your credit score is not sufficient to qualify for a mortgage, you may consider adding a trusted co-signer or co-borrower to your application. A co-signer is responsible for the mortgage if you, the primary borrower, cannot make payments, while co-borrowers have joint ownership of the loan and the home. However, it is crucial to ensure that you can keep up with payments to avoid putting your co-applicant in a financial bind.

Some online mortgage lenders and credit unions offer more flexible borrower requirements than traditional banks, making it possible to qualify for a loan with a lower credit score. Additionally, if you do not have a credit score at all, some lenders may allow you to apply with proof of making on-time payments, such as utility bills.

It is important to understand the total cost of a mortgage, especially when applying with a lower credit score. Lenders may offset the risk of a lower credit score by charging a higher interest rate, requiring a larger down payment, or implementing mortgage insurance. Therefore, it is essential to carefully review the total loan package, including any loan origination fees or other charges.

There are specific types of home loans designed to help buyers with lower credit scores purchase a home. For example, mortgages insured by the Federal Housing Administration (FHA) have lower minimum credit score requirements, with options for down payments as low as 3.5%. VA loans from the U.S. Department of Veterans Affairs do not set a minimum credit score requirement and do not require a down payment or mortgage insurance.

In conclusion, while obtaining a mortgage with bad credit may present challenges, it is possible with the right approach. By taking steps to improve your credit, exploring alternative loan options, and understanding the total cost of borrowing, you can increase your chances of buying a home even with a less-than-perfect credit score.