Yes, you can get a mortgage with bad credit—but it will cost you more and you’ll have fewer options. FHA loans accept credit scores as low as 500, while some lenders specialize in working with damaged credit. Here’s exactly how to get approved and what to expect.
Minimum Credit Scores by Mortgage Type
Different loan programs have dramatically different credit requirements. Understanding which programs exist—and which ones you actually qualify for—is the first step toward homeownership with bad credit. The good news is that government-backed loans were specifically designed to help borrowers who don’t qualify for conventional financing.
FHA loans stand out as the most accessible option for borrowers with credit challenges. They’re insured by the Federal Housing Administration, which means lenders face less risk and can be more flexible with approval criteria. VA loans (for veterans) and USDA loans (for rural areas) also offer paths to homeownership without perfect credit.
| Loan Type | Official Minimum | Typical Lender Minimum | Down Payment Required |
|---|---|---|---|
| FHA | 500 | 580-620 | 3.5% (580+) or 10% (500-579) |
| Conventional | 620 | 640-660 | 3-20% |
| VA (veterans) | None | 580-620 | 0% |
| USDA (rural) | None | 640 | 0% |
| Non-QM | None | 500-600 | 10-30% |
| Portfolio/private | Varies | Varies | 15-30% |
FHA loans are your best option if you have bad credit. They’re government-backed and designed specifically to help borrowers who might not qualify for conventional mortgages.
What Qualifies as “Bad Credit” for a Mortgage?
The definition of “bad credit” depends on who you ask. Banks and mortgage lenders use different thresholds than credit card companies, and what’s considered acceptable for an FHA loan might be rejected for a conventional mortgage. Understanding where you fall on this spectrum helps you target the right loan programs.
Generally, a credit score below 620 is considered “bad” for mortgage purposes. However, there’s a big difference between someone at 580 (who can still get FHA financing with a reasonable down payment) and someone at 500 (who faces much stricter requirements). Each 20-point drop in score typically narrows your options further.
| Credit Score Range | Category | Mortgage Options |
|---|---|---|
| 760-850 | Excellent | All loans, best rates |
| 700-759 | Good | All loans, competitive rates |
| 660-699 | Fair | Most loans, slightly higher rates |
| 620-659 | Below average | Conventional (barely), FHA, VA |
| 580-619 | Poor | FHA, VA, some USDA |
| 500-579 | Bad | FHA only (10% down) |
| Below 500 | Very bad | Non-QM, portfolio only |
FHA Loans: The Best Option for Bad Credit
FHA loans are insured by the Federal Housing Administration and have the most lenient credit requirements:
FHA Requirements by Credit Score
FHA loans offer a sliding scale of requirements based on your credit score. The higher your score, the smaller down payment you need. This gives you a clear goal if you’re on the borderline—getting from 575 to 580 could save you thousands in down payment requirements.
It’s worth noting that while the FHA publishes official minimums, individual lenders (called “FHA-approved lenders”) can set their own higher thresholds. You might need to shop around to find a lender willing to work with the lower end of the FHA range.
| Credit Score | Down Payment | Mortgage Insurance | DTI Limit |
|---|---|---|---|
| 580+ | 3.5% minimum | 1.75% upfront + 0.85% annual | 43% (up to 50% with factors) |
| 500-579 | 10% minimum | 1.75% upfront + 0.85% annual | 43% |
FHA Pros and Cons:
| Pros | Cons |
|---|---|
| Low credit score accepted | Mortgage insurance for life of loan |
| Small down payment (3.5%) | Loan limits vary by county |
| Higher DTI allowed | Property must meet FHA standards |
| Gift funds for down payment OK | Primary residence only |
FHA Loan Example: 580 Credit Score
| Scenario | Amount |
|---|---|
| Home price | $300,000 |
| Down payment (3.5%) | $10,500 |
| Base loan amount | $289,500 |
| Upfront MIP (1.75%) | $5,066 (financed) |
| Total loan amount | $294,566 |
| Monthly payment (6.5% rate) | $1,862 |
| Monthly MIP (0.85%) | $209 |
| Total monthly (P&I + MIP) | $2,071 |
How Bad Credit Affects Your Mortgage Rate
Bad credit doesn’t just make getting approved harder—it makes your mortgage significantly more expensive. Interest rates are tiered by credit score, with each tier costing you more per month and dramatically more over the life of the loan. The difference between “excellent” and “bad” credit on a 30-year mortgage can easily exceed $100,000.
This is why many financial advisors recommend waiting to buy if you’re close to a credit score threshold. Improving your score by even 20-40 points before applying could save you more than a year’s salary over the life of your loan.
Bad credit means higher interest rates, which significantly increases your total cost:
| Credit Score | Typical Rate | Monthly Payment* | Total Interest Paid* |
|---|---|---|---|
| 760+ | 6.25% | $1,847 | $364,920 |
| 700-759 | 6.50% | $1,896 | $382,560 |
| 680-699 | 6.75% | $1,946 | $400,560 |
| 660-679 | 7.00% | $1,996 | $418,560 |
| 640-659 | 7.25% | $2,048 | $437,280 |
| 620-639 | 7.50% | $2,098 | $455,280 |
| 580-619 | 8.00% | $2,201 | $492,360 |
*Based on $300,000 loan, 30-year term
Cost of bad credit over loan life:
| Compared to Excellent Credit | Extra Cost |
|---|---|
| 620-639 credit score | $90,360 |
| 580-619 credit score | $127,440 |
Steps to Get a Mortgage With Bad Credit
Step 1: Check Your Credit Report
Get free credit reports from AnnualCreditReport.com and review for errors:
| Item to Check | Why It Matters |
|---|---|
| Late payments | May be reported incorrectly |
| Account balances | Should match your records |
| Accounts that aren’t yours | Identity theft red flag |
| Old negative items | May be eligible for removal after 7 years |
| Duplicate accounts | Same debt reported twice |
Step 2: Know Your Numbers
| Information Needed | Where to Find It |
|---|---|
| Credit scores (all 3 bureaus) | Credit monitoring service or lender |
| Current debts | Credit report + statements |
| Monthly income | Pay stubs, tax returns |
| Assets for down payment | Bank statements |
Step 3: Calculate Your DTI
Lenders look at your debt-to-income ratio:
| DTI Component | What’s Included |
|---|---|
| Front-end (housing) | Mortgage payment + taxes + insurance |
| Back-end (total) | Housing + all other debt payments |
Maximum DTI by loan type with bad credit:
| Loan Type | Front-End Max | Back-End Max |
|---|---|---|
| FHA | 31% | 43% (up to 50% with compensating factors) |
| Conventional | 28% | 36-45% |
| VA | Not limited | 41% (can exceed with residual income) |
Step 4: Shop Multiple Lenders
| Lender Type | Best For | Credit Score Flexibility |
|---|---|---|
| FHA-approved lenders | Low credit scores | High |
| Credit unions | Local, flexible underwriting | Medium-High |
| Mortgage brokers | Shopping multiple lenders | Varies |
| Online lenders | Faster processing | Medium |
| Big banks | Existing customers | Lower |
Shopping tip: Multiple mortgage inquiries within 14-45 days count as one inquiry for scoring purposes.
Compensating Factors That Help Bad Credit Borrowers
Mortgage underwriting isn’t purely mechanical—human judgment plays a role, especially with FHA and VA loans. If you have bad credit but other financial strengths, lenders can use “compensating factors” to justify your approval. Think of these as ways to prove you’re a better risk than your credit score suggests.
The most powerful compensating factor is a large down payment. If you’re putting 20%+ down, the lender has a significant cushion even if you default. Similarly, having several months of mortgage payments sitting in a savings account demonstrates that you can weather financial storms.
Lenders may approve you despite bad credit if you have:
| Compensating Factor | How It Helps |
|---|---|
| Large down payment | 10-20%+ reduces lender risk |
| Cash reserves | 3-6 months of payments in savings |
| Low DTI | Under 36% shows strong affordability |
| Stable employment | 2+ years at same job/industry |
| High income | More buffer for payments |
| Explanation letter | Valid reason for past credit issues |
| Co-signer | Adds creditworthy person to loan |
What If Your Credit Score Is Below 500?
Credit scores below 500 put you in challenging territory for mortgage financing. Traditional government-backed loans won’t be available, and you’ll need to explore alternative lending options—which come with higher rates and stricter requirements. But it’s not impossible.
Non-QM (non-qualified mortgage) lenders specialize in borrowers who don’t fit conventional boxes. They’ll lend based on bank statements instead of W-2s, work with credit scores that traditional lenders reject, and consider the whole picture of your financial situation. The trade-off is rates that are 2-4 percentage points higher than conventional loans.
| Option | What’s Required | Typical Rates |
|---|---|---|
| Non-QM lenders | 10-30% down, bank statements | 7-12% |
| Portfolio lenders | Relationship with bank, assets | 8-12% |
| Hard money lenders | 30-40% down, property as collateral | 10-15% |
| Seller financing | Willing seller | Negotiable |
| Rent-to-own | Time to repair credit | Varies |
| Wait and repair credit | Time, discipline | N/A |
Non-QM loan requirements:
| Factor | Typical Requirement |
|---|---|
| Credit score | 500-600 minimum |
| Down payment | 10-30% |
| Interest rate | 1-4% above conventional |
| Income verification | Bank statements (12-24 months) |
| Asset requirements | More than conventional |
How to Improve Your Credit Before Applying
If you have time, even small improvements can help:
Quick Wins (1-3 Months)
| Action | Potential Score Impact |
|---|---|
| Pay down credit cards below 30% utilization | +20-50 points |
| Become authorized user on established account | +10-30 points |
| Dispute errors on credit report | +10-50 points |
| Pay off collections (pay-for-delete) | +10-30 points |
Medium-Term (3-6 Months)
| Action | Potential Score Impact |
|---|---|
| Get a secured credit card | +20-40 points |
| Make all payments on time | +10-30 points |
| Avoid new credit applications | +5-10 points |
| Mix of credit types | +10-20 points |
Impact on Mortgage Options
| Starting Score | After 3 Months | New Options |
|---|---|---|
| 560 | 600 | FHA with 3.5% down |
| 600 | 640 | Better FHA rates, some conventional |
| 620 | 680 | Good conventional rates |
What Caused Your Bad Credit Matters
Lenders don’t just look at your credit score—they look at why it’s low. A score of 580 due to medical bills is viewed very differently than a 580 due to a recent foreclosure. Understanding this distinction can help you frame your situation in the best possible light during the application process.
Medical debt, for example, is increasingly given less weight by both credit scoring models and human underwriters. Everyone understands that a health crisis can devastate finances without reflecting poor financial judgment. Job loss during economic downturns gets similar sympathy, especially if you’ve recovered and maintained stable employment since.
Lenders look at why your credit is bad:
| Credit Issue | Lender View | Waiting Period |
|---|---|---|
| Medical collections | More lenient, sometimes ignored | None-1 year |
| Job loss/reduced income | Understandable with documentation | 1-2 years |
| Divorce | Understandable with documentation | 1-2 years |
| Bankruptcy (Chapter 7) | Serious | 4 years (conv.), 2 years (FHA) |
| Foreclosure | Very serious | 7 years (conv.), 3 years (FHA) |
| Short sale | Serious | 4 years (conv.), 3 years (FHA) |
Common Mistakes to Avoid
| Mistake | Why It’s a Problem |
|---|---|
| Applying at just one lender | Miss better rates and approvals |
| Not checking credit report first | Surprises kill applications |
| Making large purchases before closing | DTI increases, approval denied |
| Changing jobs before/during process | Income verification issues |
| Opening new credit accounts | Lowers score, triggers review |
| Moving money around | Makes assets harder to verify |
| Being dishonest about issues | Fraud, immediate denial |
Key Takeaways
| Question | Answer |
|---|---|
| Can you get a mortgage with bad credit? | Yes |
| Best loan option | FHA loans |
| Minimum credit score (FHA) | 500 (10% down) or 580 (3.5% down) |
| How much more does bad credit cost? | $50,000-$150,000+ over loan term |
| Best strategy | Improve credit if possible, shop multiple lenders |
Bottom line: Getting a mortgage with bad credit is absolutely possible—millions of Americans do it every year through FHA loans and other programs. However, you’ll pay significantly more in interest. If you can wait 3-6 months to improve your credit score, even a 20-40 point increase could save you tens of thousands over the life of your loan.