How to Get a Home Loan With Poor Credit

If your credit score isn’t as high as you would like it to be, but you are ready to become a homeowner, you probably want to know how to get a home loan with poor credit. Is it even possible? Yes, depending on how low your credit score is, how much money you are prepared to put down, and a few other factors.

Learning how to get a home loan with poor credit can help make your home-buying dreams a reality. You can also discover some practical tips for improving your score so that you can become a more appealing applicant to lenders. 

How to get a home loan with poor credit

If you’re trying to buy a home and don’t have the best credit, the process can be tough and frustrating. 

The first step is understanding that your credit score is only part of the equation. While you will need to be at or above the minimum threshold based on the type of loan you want to take out, you also need a strong credit history that shows you make your payments on time. 

Additionally, lenders want to see that you have enough assets to cover the down payment and closing costs, as well as maintain emergency cash reserves. These are all indicators of your financial stability. 

Is it possible to qualify with a low credit score?

Yes, but there are still minimum qualifying scores. FHA loans have the lowest credit score minimums. You may be able to get an FHA loan with a credit score of 580+ and 3.5% down. If you are able to put 10% down, you may qualify for an FHA loan with a score as low as 500, although getting approved will be tough. 

What lenders look at besides your credit score

Lenders look at your payment history and your debt-to-income ratio (DTI). If a large percentage of your gross monthly income is allocated to recurring debt payments, like credit cards and auto loans, your DTI will be higher. It is a sign that you are stretched thin financially. 

Minimum score requirements by loan type

Here’s a breakdown of the score you’ll need for each type of mortgage loan:

• FHA: 580 or as low as 500 with 10% down
• VA: No set minimum, but lenders generally require 620 or higher
• Conventional: 620+
• USDA: 640+ is required by most lenders

There are exceptions, but those usually mean paying more money down. 

Best home loan options for poor credit

If your credit score is not the greatest, certain options give you a better chance. 

FHA loans

FHA loans are the most flexible, allowing for a score as low as 500 with 10% down or as low as 580 with 3.5% down. However, a lower score will mean a higher interest rate, which will impact your monthly payments and the total cost of borrowing money. 

VA loans

VA loans have some flexibility for qualifying service members and veterans. However, many lenders are strict about the 620 credit score requirements. 

USDA loans

While lenders typically require a 640 or higher for USDA loans, you don’t have to put any money down, which can make home buying more accessible. USDA 504 loans require a minimum credit score of 620, but you will be subject to a more stringent credit history review. 

Non-QM and alternative lenders 

Non-qualifying mortgage loans and alternative funding options can make homebuying possible, but they are also very risky. Typically, these loans are better suited for investors or individuals who can put more money down. 

What is considered poor credit for a mortgage?

Generally, anything under a 620 credit score is considered poor credit for a mortgage. If you are under this threshold, it will be harder to qualify for a loan. 

How mortgage lenders define risk

When assessing your risk, mortgage lenders evaluate the following:

• DTI
• Cash reserves
• Credit score
• Credit history

If you are strong in these other areas but don’t have the best score, you may still be able to get approved for a loan. However, be prepared for lenders to ask if you have a co-signer or inquire if you can put more money down. 

How to improve your chances of approval

If you are ready to buy a home but your score isn’t as high as you would like it to be, you can take a few other steps to make yourself a more appealing applicant. These tips will also boost your score, so it’s a win-win. 

Increase your down payment

Saving up extra money for a down payment can help you qualify for more flexible loan options, such as the FHA 10% down loan. That program approves borrowers with a credit score as low as 500. Putting more money down will also lower your monthly payment and result in long-term interest savings, as you’ll be financing a lower amount. 

Lower your debt-to-income ratio

Paying off recurring bills, like credit cards or a vehicle, can reduce your DTI. If you have a very low DTI, lenders may be more open to approving your mortgage application, even if your score could use some work. 

Add a co-signer

A co-signer can significantly strengthen your application, especially if they have a positive financial history and a strong credit score. The co-signer will need to be someone you trust and who trusts you. Co-signing on a mortgage is a huge commitment, as the co-signer will be responsible for the loan if you default. 

Show stable income and employment history

Lenders want to see that you are consistently employed, preferably in the same field and with the same organization. A stable income also goes a long way in boosting your odds of approval, as it allows them to accurately assess how much you earn each pay period. 

Conclusion

To increase your credit score, you need a strong financial history that shows you consistently pay your bills on time. 

Solutions like Kikoff can help build your credit history by reporting verified rent payments to the credit bureaus. Kikoff also includes a free dispute letter generator, in case you uncover any errors on your report that you need to contest.

Signing up for Kikoff is free. You can create an account without a hard credit inquiry and start claiming positive financial behavior to strengthen your profile. Add positive payment history to your credit profile with Kikoff.