How To Buy A House With Bad Credit | Loan Options 2025
Buying a home with less-than-perfect credit might feel impossible, but it’s more achievable than you think. While a low credit score can limit your options, several loan programs are designed specifically for borrowers in your situation. With the right approach and some strategic planning, homeownership is within reach.
This guide breaks down what qualifies as bad credit, which loan types are available to you, and how to improve your chances of approval.
What Qualifies as “Bad Credit”?
Credit scores typically range from 300 to 850. Here’s how lenders generally classify them:
- Excellent: 750+
- Good: 700–749
- Fair: 650–699
- Poor: 600–649
- Bad: Below 600
A score below 620 is often considered bad credit in the mortgage world. At this level, conventional loans become difficult to secure. However, you’re not out of options. Many lenders offer products tailored to borrowers with scores as low as 500.
Loan Options for Low-Credit Borrowers
FHA Loans
Federal Housing Administration (FHA) loans are one of the most accessible options for buyers with bad credit. These government-backed loans require:
- Minimum credit score: 500 with 10% down, or 580 with 3.5% down
- Debt-to-income ratio: Typically 43% or lower
- Mortgage insurance: Required for the life of the loan (if you put down less than 10%)
FHA loans are popular because they offer competitive interest rates and flexible qualification standards. They’re ideal if you’re a first-time buyer or rebuilding your credit.
VA Loans
If you’re a veteran, active-duty service member, or eligible spouse, VA loans can be an excellent choice. While there’s no official minimum credit score set by the Department of Veterans Affairs, most lenders prefer a score of at least 620. Benefits include:
- No down payment required
- No private mortgage insurance
- Competitive interest rates
USDA Loans
USDA loans support homebuyers in eligible rural and suburban areas. While the program doesn’t set a minimum credit score, most lenders look for at least 640. Key features include:
- Zero down payment
- Lower mortgage insurance costs than FHA loans
- Income limits apply
Non-QM Loans
Non-Qualified Mortgage (Non-QM) loans offer flexibility for borrowers who don’t fit traditional lending criteria. These loans consider alternative factors like bank statements or asset reserves rather than relying solely on credit scores. Non-QM loans can work well if you’re self-employed, have irregular income, or need a more customized loan structure.
However, expect higher interest rates and larger down payment requirements compared to government-backed loans.
Subprime Mortgages
Subprime mortgages are designed for borrowers with credit scores below 620. They come with higher interest rates to offset the lender’s risk. While these loans can help you secure a home now, refinancing to a better rate once your credit improves is often a smart move.
How To Improve Your Chances of Approval
Getting approved for a mortgage with bad credit requires some extra effort. Here’s how to boost your odds:
Check your credit report. Request a free copy of your credit report and review it for errors. Dispute any inaccuracies that could be dragging down your score.
Pay down existing debt. Lowering your credit utilization ratio shows lenders you’re managing your finances responsibly. Aim to keep balances below 30% of your credit limits.
Save for a larger down payment. A bigger down payment reduces the lender’s risk and can improve your approval chances. It may also help you secure better loan terms.
Avoid new credit inquiries. Each hard inquiry can temporarily lower your score. Limit applications for new credit cards or loans while you’re preparing to buy a home.
Consider a co-signer. If someone with strong credit is willing to co-sign your loan, it can improve your approval odds. Just remember that they’ll share responsibility for the debt.
Work with a mortgage advisor. An experienced advisor can guide you toward the best loan options for your situation and help you navigate the approval process.
Plan Your Path to Homeownership
Buying a house with bad credit takes patience and preparation. Start by setting a realistic budget and understanding which loan programs fit your needs. Focus on improving your credit score over time, even after you’ve secured a mortgage. Better credit opens doors to refinancing opportunities and lower interest rates down the road.
It’s also wise to build an emergency fund. Homeownership comes with unexpected expenses, and having savings set aside will help you avoid financial stress.
Finally, partner with a knowledgeable mortgage advisor who understands the challenges of buying with bad credit. At Altius Mortgage in Draper, UT, we specialize in helping borrowers find the right loan solutions, no matter where they are on their credit journey. Reach out today to explore your options and take the first step toward owning your home.
