How to Get a Home Loan With Bad Credit

A low credit score doesn't rule out a home loan. FHA loans go as low as a 500 score with 10% down, and VA and USDA loans set no programwide minimum. Lenders also look at your income, debt, savings, and the home itself.

What your score changes most is the price. The rate you're offered applies to your whole balance for as long as 30 years. That makes the steps you take before you apply worth as much as the application itself.

How to get a home loan with bad credit: Step by step

1. Know where your credit stands

Most card issuers and banks show your score through an online portal or app, as do many services like Kikoff. Note which scoring model it's using: The score in your banking app may be VantageScore, and mortgage lenders tend to pull FICO Score versions instead. In that case, the number you see may not be what the lender sees.

Treat your score as a starting point, not a verdict. Lenders look past the number to the report behind it, including how recent any late payments, how you've paid since, how much you're putting down, and how much you earn.

When you talk with lenders, ask about the scoring model they use, their minimums for the loan you want, and what other factors they weigh. Many will tell you directly whether you're close, which is worth knowing before you spend money applying.

2. Review your credit reports for errors

You can get a free report from each of the three bureaus weekly at AnnualCreditReport.com. They won't include your credit score, but they show everything behind it: accounts new and old, past balances, even past addresses.

Carefully read them for anything that's factually wrong, like accounts you don't recognize, payments marked late that you paid on time, paid-off balances still showing as open, or information mixed into your file that's not yours.

Dispute reporting errors directly with the credit bureau showing them and with the creditor that reported them. It's free to do yourself, or if you'd rather not draft the letters yourself, Kikoff's AI Credit Disputes helps you prepare them, and Premium and Ultimate plans can mail them for you.

Bureaus generally have 30 days to investigate. Credit monitoring can alert you when your report changes, so you'll know the correction posted before a lender pulls it.

3. Look into government-backed programs

FHA loans are a well-known option for borrowers with lower scores. FHA policy allows scores as low as 500 with at least 10% down or 580 with as little as 3.5% down. That's the program's minimum, though, and lenders set their own minimums on top of it. Also, meeting the program threshold doesn't mean you'll be approved.

Three other loans worth asking about:

• VA loans. The Department of Veterans Affairs sets no minimum for eligible borrowers, though individual lenders can.
• USDA loans. The USDA's Section 502 program has no program-wide minimum credit score, but does have income limits and rules about where the property is located.
• Conventional loans. These loans require higher scores generally, but it's worth a conversation, since requirements vary by lender.

Ask for what you qualify for rather than assuming an FHA loan is your only path forward.

4. Save for a down payment and closing

A larger down payment means borrowing less, which can improve the rate and terms a lender offers. Ask each lender to show you a few scenarios at 3.5% down versus 10% or 20%, including how it changes your monthly payment, mortgage insurance, and cash due at closing.

But don't drain your account to get there. Closing costs typically run 2% to 5% of the purchase price, and then there's moving costs, immediate repairs, and whatever else you might bump into.

For a buyer with poor credit, that cushion is important. Reaching for your credit card to cover a surprise expense raises your utilization right when you least want it to.

Run the numbers >> Use Kikoff's mortgage calculator to see how 3.5% down compares with 10% or 20% on your monthly payment.

5. Consider a cosigner or co-borrower

A co-borrower applies with you and takes ownership of the home, usually a spouse or partner. A cosigner takes on the debt without a name on the title, though not every loan program allows it. Either way, the obligation is the same: anyone who signs the loan owes the full balance if payments stop, not just half.

A second person’s income can strengthen an application, but a lender reviews their whole file along with yours, including their debts, their payment history, and their other financial obligations. Often that helps, but sometimes it doesn't, so have your lender run both scenarios before asking anyone to sign.

Also consider that getting off a mortgage later typically means refinancing, leaving the remaining borrower to qualify alone.

6. Shop around for lenders

Of all the steps, this one stands to save you the most money. The CFPB recommends getting loan estimates from at least three lenders. That comparison matters more for those with lower scores than for borrowers with perfect credit.

With loans and costs in hand, compare these three in order:

• The APR, and not just the rate. The annual percentage rate folds in points and lender fees, which is why two loans quoted at the same rate can end up costing differently.
• Mortgage insurance. Understand how much, and how long you'll pay it. On an FHA loan, it's often required for the life of your loan.
• Cash due at closing. Include upfront taxes, insurance, and other fees that don't show up in the rate.

Preapproval is an estimate, not a commitment. Once you have a specific house in mind, request official loan estimates from multiple lenders. It's a standard format that lets you compare terms side by side. And if you ask for several inside a 45-day window, the credit inquiries count as a single inquiry.

Then check the payment against your actual budget. The loan estimate includes principal, interest, taxes, and insurance, but it won't show utilities or maintenance.

Read more >> How To Lower Your Monthly Mortgage Payment

What if your score is below a lender’s minimum?

A no from one lender doesn't tell you what every lender will decide. A score that falls short at one bank may clear at a credit union or a lender that specializes in FHA loans.

Ask the lender if there's another program you'd qualify for and the score you'd actually need. A specific number tells you how far you need to go.

If you're not sure whether to apply now, a HUD-approved housing counselor can walk you through your budget and options, often for free. Find one through the CFPB's housing counselor search or call HUD at 800-569-4287.

Read more >> Can I get approved for an FHA loan with a 500 credit score?

How to build your credit before applying

If you can wait, use that time strategically. Pay every one of your debts on time, pay down credit card balances where you can, and dispute any errors on your credit report. Those three things are what lenders are reading, and they're actually in your control.

Avoid opening new credit in the months before you apply. If you need to, talk with your mortgage lender first, because a new account can change the numbers it's relying on.

You can also get credit for payments that don't typically count. Landlords and rental companies often don't report to the bureaus, so years of on-time rent may not show up on your credit reports. Kikoff's rent reporting sends verified payments to Equifax and TransUnion, and it can add up to two years of past rent for a one-time $50 fee, so that history is there before you apply rather than after. Kikoff's bill reporting reports eligible phone and utility payments. Rent reporting is included with every Kikoff plan, and bill reporting with Premium and Ultimate.

These payments count only in newer scoring models like VantageScore 4.0, not the Classic FICO scores many mortgage lenders still use, so ask your lender which model it pulls. Credit moves over months, not weeks, and so no service can promise a specific score or guarantee a mortgage approval.

Read more >> How to dispute credit report errors

Bottom line

You can find a home loan if you have a lower credit score. It's only one part of what a lender reviews. The steps that matter most happen before you apply: fixing errors on your reports, finding out which score a lender uses, comparing offers side by side, and keeping cash in reserve after closing.

Getting approved is one question. What you'll pay is another, and your score shapes that rate for the life of the loan. If you have time before you apply, a Kikoff Credit Account reports your on-time payments to Equifax, Experian, and TransUnion. There's no credit check to sign up, and plans start at $5 a month. If you're applying soon, check with your lender before opening any new account.