Having a low credit score does not automatically disqualify you from becoming a homeowner. While it is true that higher credit scores typically lead to better mortgage rates and terms, many lenders in the United States offer mortgage options specifically designed for borrowers with bad credit or limited credit history. Understanding these lenders and loan programs can help you navigate the homebuying process more confidently and realistically.
What Is Considered Bad Credit for a Mortgage?
In mortgage lending, a credit score below 620 is generally considered low or poor. Borrowers in this range may face higher interest rates, stricter qualification standards, or limited loan choices. However, government-backed programs and certain lenders are more flexible and willing to work with lower credit scores.
Best Mortgage Options for Low Credit Borrowers
1. FHA-Approved Lenders (Best Overall Option)
FHA loans, backed by the Federal Housing Administration, are the most popular mortgage option for borrowers with bad credit.
Key features:
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Minimum credit score of 580 with a 3.5% down payment
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Scores as low as 500 may qualify with a 10% down payment
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More flexible debt-to-income requirements
Many major lenders—such as Rocket Mortgage, Pennymac, and New American Funding—offer FHA loans and are known for working with low-credit borrowers.
Pros:
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Easier qualification standards
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Competitive interest rates compared to subprime loans
Cons:
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Mortgage insurance premiums (MIP) are required, often for the life of the loan
Best for: First-time buyers or borrowers rebuilding credit.
2. VA Lenders (For Eligible Veterans and Military Members)
VA loans are one of the best mortgage products available for borrowers with low credit, provided they are eligible.
Key advantages:
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No official minimum credit score set by the VA
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No down payment required
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No private mortgage insurance (PMI)
Many VA lenders approve borrowers with credit scores in the 500–580 range, depending on overall financial strength.
Best for: Veterans, active-duty service members, and qualifying spouses.
3. USDA-Approved Lenders (Rural and Suburban Buyers)
USDA loans are designed for low- to moderate-income borrowers purchasing homes in eligible rural or suburban areas.
Highlights:
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No down payment required
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More forgiving credit standards than conventional loans
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Lower mortgage insurance costs than FHA loans
While many lenders prefer a score of 640, some USDA lenders accept lower scores with manual underwriting.
Best for: Buyers with low credit purchasing homes outside major urban centers.
Mortgage Lenders Known for Working With Bad Credit
Rocket Mortgage
Rocket Mortgage offers FHA and VA loans and uses automated systems that consider more than just credit scores. Borrowers with stable income and manageable debt may qualify even with less-than-perfect credit.
New American Funding
This lender is well known for manual underwriting, which allows loan officers to review the full financial picture rather than relying solely on credit scores.
Carrington Mortgage Services
Carrington specializes in non-prime and low-credit borrowers, offering both FHA and non-QM loan options for those who may not qualify elsewhere.
Guild Mortgage
Guild Mortgage offers FHA, VA, and USDA loans and is known for personalized service, which can benefit borrowers needing extra guidance.
Non-Qualified Mortgage (Non-QM) Lenders
For borrowers with very poor credit or recent financial hardship (such as bankruptcy or foreclosure), non-QM lenders may be an option.
Characteristics:
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Higher interest rates
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Larger down payment requirements
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More flexible income documentation
Examples include bank statement loans for self-employed borrowers or loans with recent credit events.
Best for: Borrowers who do not meet traditional lending guidelines but can afford higher costs.
How to Improve Approval Chances With Bad Credit
If you have a low credit score, lenders will look closely at other financial factors. You can improve your chances by:
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Saving for a larger down payment
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Reducing existing debt
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Showing stable income and employment
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Avoiding new credit inquiries
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Correcting errors on your credit report
Even a small credit score increase—such as from 560 to 580—can unlock better loan options.
What to Expect in Terms of Rates and Costs
Borrowers with bad credit typically face:
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Higher interest rates
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Mortgage insurance requirements
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Higher monthly payments
However, refinancing later—after improving your credit—can significantly reduce long-term costs.
Conclusion
While bad credit can make the mortgage process more challenging, it does not eliminate the possibility of homeownership. FHA, VA, and USDA loans—along with lenders experienced in low-credit lending—provide viable pathways for borrowers with low credit scores. By understanding available options, preparing financially, and choosing the right lender, borrowers with bad credit can still achieve their goal of owning a home.
