Best Mortgage Lenders for Bad Credit
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You dream of owning a home, but there’s just one issue. Your credit isn’t the best. Maybe you’ve missed some payments or have gone through a , , or bankruptcy. Whatever the reason, If you have fair to bad credit, it will be more difficult to get approved for a mortgage, but it’s not impossible. Government-backed mortgage options and private lenders work with first-time homebuyers with bad credit. Read on to learn more about your mortgage options.
In this article
Overview of the best mortgage lenders for bad credit
Lender | Best for |
Freddie Mac Home Possible Mortgage | Borrowers with no credit score or low credit score |
Fannie Mae HomeReady Mortgage | Low down payment requirement of 3% |
USDA Loans | Low-income borrowers in rural areas |
VA Loans | Veterans |
FHA Loans | Borrowers with a credit score of 500 or above |
Carrington Flexible Advantage | Borrowers with a history of bankruptcy, foreclosure, or short sale |
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Best home loans for bad credit
Freddie Mac Home Possible® Mortgage
Freddie Mac offers home loans with the Home Possible® Mortgage to borrowers with a lower income and can be a good option for those who don’t have great credit.
You might be eligible even if you don’t have a credit score. To qualify, the home loan must not have a loan-to-value of more than 97%.
Getting a Freddie Mac mortgage with no credit score requires a minimum down payment deposit of 3%.
It’s also known for being flexible on income limits, which is good for low to middle-class borrowers. Freddie Mac is a government entity created by Congress to make home-buying more accessible.
Fannie Mae HomeReady Mortgage
The Fannie Mae HomeReady Mortgage works with lower-income borrowers, whether you’re a first-time homebuyer or a repeat homebuyer.
To qualify, there is a minimum credit score requirement of 620 and a 3% down payment requirement. This option is attractive to those with a low credit score or a small down payment.
First-time homebuyers who qualify for an affordable mortgage through Fannie Mae may be required to participate in Homeownership Education and Housing Counseling. This is the case for borrowers with no credit score.
Counseling is an online program that helps borrowers understand the home-buying process. It can also help you decide what you can afford and how to choose a loan. Fannie Mae is also a government entity created by Congress to make home-buying more affordable.
USDA Loans
The United States Department of Agriculture (USDA) offers home loans to borrowers who are considered low to very low income.
USDA loans are reserved for people living in rural areas, typically with a population of less than 35,000. The USDA loan program offers home loans that don’t require any down payment and have repayment terms of up to 33 years.
For very low-income borrowers, it’s possible to have up to 38 years to pay back the loan.
Through the USDA program, many lenders want a minimum score of 640. The loans are designed for low-income folks in rural areas to make homeownership possible.
VA Loans
Home loans are available to veterans via the U.S. Department of Veterans Affairs (VA). Though the loans are through private lenders, they are backed by the VA.
According to the Veterans Affairs website, “With a VA-backed home loan, we guarantee (or stand behind) a portion of the loan you get from a private lender. If your VA-backed home loan goes into foreclosure, the guarantee allows the lender to recover some or all of their losses. Since there’s less risk for the lender, they’re more likely to give you the loan under better terms. Nearly 90% of all VA-backed home loans are made without a down payment.”
So, the good thing with this option is that there are no down payment requirements in many cases. Plus, mortgage insurance isn’t a requirement, either.
VA loans are also more affordable as they tend to have lower interest rates. The VA doesn’t set credit score requirements, but you’ll need to meet the underwriting criteria that the lender sets. Veterans can take advantage of these perks and make homeownership possible. You can see more about how to apply here.
FHA Loans
The Federal Housing Administration (FHA) has supported homeowners since 1934 through FHA loans.
The FHA, part of Housing and Urban Development (HUD), can insure the loan, which helps you score a better deal from a lender. So, FHA loans are considered government-backed mortgages.
FHA loans are attractive because they suit borrowers with poor credit and low down payment. The down payment can be as low as 3.5% of the purchase price.
There is no minimum credit score requirement to qualify for a VA loan. But if your credit score is too low, you may be required by the lender to put down a down payment.
Related: Best FHA Lenders for Mortgages
Carrington Flexible Advantage
Carrington Mortgage Services, founded in 2007, offers home loans to borrowers with not-so-perfect credit and high borrowers through their Carrington Flexible Advantage product.
The minimum credit score requirement is 550; you can borrow up to 1.5 million dollars. This option stands out because you can qualify for a home loan even if you’ve recently experienced foreclosure, bankruptcy, or a short sale.
The option is also good for self-employed borrowers. The company allows bank statements as proof of income instead of tax documents. Also, there is no mortgage insurance required.
Carrington also offers the Carrington Flexible Advantage Plus and Carrington Prime Advantage for people with higher credit scores of 620 and 660, respectively. These options allow borrowers to take on up to $3.5 million.
Related: How to Buy a House with Bad Credit
Best mortgage lenders for bad credit summary
Lenders | Credit score | Down payment |
Freddie Mac Home Possible Mortgage | At least 660 | 3% |
Fannie Mae HomeReady Mortgage | At least 620 | 3% |
USDA Loans | At least 640 | 0% |
VA Loans | Most lenders require a score of 620, but it can vary | 0% in most cases |
FHA Loans | NA | 3.5% |
Carrington Flexible Advantage | At least 550 | NA |
FAQ
What is the minimum credit score I need to get a mortgage?
The required for a mortgage will vary by lender—the lowest credit score requirement for a loan through Carrington is 550.
For borrowers with a credit score of 580 or above, it’s possible to take advantage of the low down payment rate of 3.5%. In general, though, having a credit score of 620 is what you need to get approved for a government-backed mortgage.
What other factors are considered when applying for a mortgage?
Your credit score is just one factor that mortgage lenders use to determine your eligibility for a home loan. Of course, it’s hugely important. Factors such as your income, down payment, and debt-to-income ratio are considered.
Lenders want to know that their income is sufficient to repay the loan. Having 20% or more for a down payment is a good idea and can help you avoid Private Mortgage Insurance (PMI). Your debt-to-income ratio is based on the amount you pay towards debt each month relative to your gross income. Having a debt-to-income ratio of 36% or less is attractive to lenders.
What can I do to boost my credit score?
You'll want to improve your credit if your credit score is lower than the minimum credit score required to obtain a mortgage. Your FICO score consists of various contributing factors.
The factors that impact most are your payment history and the amounts owed. Your payment history makes up 35% of your credit score. The best thing you can do is pay all your bills on time. You’d also want to pay off revolving debt like credit cards.
Amounts owed make up 30% of your credit score. This refers to your credit utilization, which signifies the amount you’ve borrowed compared to your total credit available.
So, if you have a $2,000 credit limit and charge $1,000 monthly payments, your credit utilization rate is 50%. Lenders want to know that you can use the credit available to you responsibly. It’s a warning sign for them if you use too much credit. Watch how much you charge to boost your credit score and keep balances below 30%.
Also, be mindful of applying for new credit and closing old accounts. New credit also affects your credit score and your length of history.
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What is a government-backed mortgage?
A government-backed mortgage is a specific mortgage loan insured by a federal agency.
For example, the Federal Housing Administration (FHA), The Department of Veterans Affairs (VA), and the United States Department of Agriculture (USDA) all offer government-backed loans. These include FHA, VA, and USDA loans, all with specific eligibility requirements. By insuring the loan, the government protects lenders if a borrower cannot repay the mortgage.
Fannie Mae and Freddie Mac are entities created by Congress to help make homebuying more accessible and affordable to first-time homebuyers. According to the Federal Housing Finance Agency:
“Fannie Mae and Freddie Mac buy mortgages from lenders and either hold these mortgages in their portfolios or package the loans into mortgage-backed securities (MBS) that may be sold. Lenders use the cash raised by selling mortgages to the Enterprises to engage in further lending. The Enterprises’ purchases help ensure that individuals and families that buy homes, investors that purchase apartment buildings, and other multifamily dwellings have a continuous, stable supply of mortgage money.”
Government-backed loans differ from conventional loans with a private lender. Government-backed loans may have specific requirements to qualify. Conventional loans typically require good credit to be eligible.
What is a conventional loan?
Conventional loans are likely what you think of as a traditional mortgage. Conventional loans come from private lenders and aren’t backed by the government, making it riskier for lenders. That’s why many conventional loans have stricter credit requirements and a higher minimum credit score of 620. Credit scores of 740 and above may qualify for the best interest rates.
For conventional loans, you want a down payment of 20%. If your down payment is lower than 20%, you’ll likely be required to obtain Private Mortgage Insurance (PMI).
What is private mortgage insurance (PMI)?
If you apply for a conventional mortgage loan and have a down payment of less than 20% of the purchase price, you will likely be required to get private mortgage insurance (PMI). The insurance covers the lender if a borrower stops making payments on the mortgage.
Private mortgage insurance can boost your chances of getting approved for a mortgage but will add to the cost of the loan. Typically, private mortgage insurance is paid as a monthly premium on the mortgage. Some lenders work with borrowers who have less than 20% for a down payment and don’t require private mortgage insurance. However, higher interest rates may be the case.
What debt-to-income ratio do you need to qualify for a mortgage?
When applying for a mortgage, the lender will review your . That’s how much you spend in monthly debt payments relative to what you bring in each month with your income.
You can calculate your debt-to-income ratio by adding up your monthly debt payments. After that, you want to determine your gross monthly income (before any taxes, etc., are taken out). Then, divide your total debt payments by your gross monthly income.
For example, if your monthly debt payments are $1,000 and your monthly gross income is $3,000, your debt-to-income ratio is 33%. Typically, the highest debt-to-income ratio you can have and still qualify for a mortgage is 43%. The reason is that there is evidence showing that borrowers with a higher debt-to-income ratio are considered a risk and may have more trouble making mortgage payments. Some lenders will work with you if your debt-to-income ratio is higher, but it’s rare.
Some lenders use the 28/36 rule, which states that 28% of gross monthly income should be the maximum you spend on housing costs and that no more than 36% should go toward all debt payments. You can consider this general rule when planning to apply for a mortgage.
Some ways to lower your debt-to-income ratio include paying down debt and increasing your income.
Why you should check out these lenders
Not all is lost if your credit requires some improvement and you dream of owning a home. You can check out the above lenders who work with borrowers with less-than-ideal credit. On top of that, you can also research credit unions in your area to see about mortgage options and any eligibility requirements.
Many of these mortgage lending options are designed to work with first-time homebuyers who may have a low income with bad credit. So, while you may not be approved for all conventional mortgage loans, you can consider the loan options listed above. You may need a higher down payment and interest rate depending on your credit.
The bottom line
If you have bad credit, buying a house is still possible through various mortgage options like government-backed mortgages and private lenders. Make sure to read through the eligibility requirements when it comes to your credit score as well as any down payment requirements. When working with mortgage lenders for bad credit, don’t be afraid to ask questions so you can make the home-buying process as easy as possible.
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Writer
Melanie Lockert is the founder of the blog and author of the book, Dear Debt. Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Business Insider, VICE, Allure and more. Melanie writes about student loans, credit, and mental health and also is the host of The Mental Health and Wealth Show podcast.
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