If you have bad credit or a low credit score, you can still qualify to buy a home or refinance your current mortgage. Here's how to find the right lender.
How to find a home loan when you have bad credit
You don't have to feel like you're being judged for having flawed credit. Here are four tips that will give you the knowledge to talk to mortgage lenders with confidence and choose one that’s best for you, even if your credit score isn't sky-high.
1. Know the credit score you have and the score you need
You might believe you have bad credit because of some late or missed payments. But before you assume your credit score is in the basement, you need to find out what it truly is, for a couple of reasons:
- Your credit score could be higher than you think
- Knowing your score will help you understand which loan programs you're likely to qualify for
You can get your credit score free by creating your NerdWallet account. Your credit score dashboard not only tells you your score, but also describes how you fare in six factors that affect it, including how much of your available credit you’re using, payment history and average age of accounts.
If your credit score is:
740 and higher: You are eligible for the lowest interest rates and fees.
700-739: You are eligible for most mortgage programs, with relatively low rates and fees.
620-699: You might be eligible for some conventional loan programs as well as Federal Housing Administration or U.S. Department of Veterans Affairs loans.
580-619: Your best bet might be the FHA in this slice of credit scores. With a credit score of 580 and higher, you can qualify for an FHA loan with a 3.5% down payment. You might qualify for a VA loan, too, with the right mix of income and expenses. Find the best VA lenders.
500-579: You might qualify for an FHA loan if you have a down payment of 10%. Not all FHA lenders will approve mortgages with credit scores in this range, so you might have to shop around. Try the guide to best FHA lenders or a local mortgage broker.
When talking to a loan officer in person or on the phone, bring up your credit score at the beginning. That way, you'll find out immediately if the lender can help you or if continuing the conversation would be a waste of time.
If your credit score could use a lift, you can start by checking your credit report to find out if it contains inaccurate information. Mistakes are not uncommon.
There are three main credit bureaus, and you are entitled to request a free credit report from each of them annually or when you are denied credit, insurance or a job because of poor or limited credit.
» MORE: How to improve your credit score
2. Know how much you can afford — and borrow
If you have not-so-good credit and you're looking to buy a home, use a home affordability calculator to establish a baseline budget to understand how a home loan will affect your monthly finances.
As you shop for lenders, one of the first steps they'll take is to assess how much you’re eligible to borrow, based on your income and expenses. This amount may be more than you feel you can afford, so understanding what you can afford is really important before shopping for loans and getting preapproved.
From lender to lender, the estimates of what you can borrow shouldn't vary much. If one estimate is significantly lower or higher than others, ask why. The answer could help you narrow down your search for the right lender.
3. Look for lenders that offer FHA or VA loans
The FHA is well-known for allowing down payments as low as 3.5% for most qualified borrowers. But it's friendly to home buyers for another reason: being more forgiving of low credit scores.
Many conventional mortgage programs won't approve home loans for applicants with credit scores lower than 620. But FHA loans can be an option with credit scores below 620 and into the 500s. Lenders have varying credit score requirements on mortgages, including on FHA loans, so it's a good idea to shop around.
The VA doesn't have a minimum credit score requirement, but most lenders do. If your credit score is less than 620, you might have to search for a lender that will offer a VA loan with a score that low.
4. Come to the table with a bigger down payment
With a low credit score, you'll want to look for what some lenders call "compensating factors" that partially offset the dings to your credit. One of the most effective compensating factors is a hefty down payment. Lenders know you'll work hard to avoid foreclosure if you've made more than the minimum down payment. That means you're less risky to lend to.
Conventional lenders tend to charge less for credit-challenged borrowers who make down payments greater than 10%.
Another compensating factor is a low debt-to-income ratio. If your house payment will take up 28% or less of your before-tax income, that's a mark in your favor when you apply for a mortgage.
Bring up your compensating factors early in the conversation with a loan officer — preferably, immediately after you discuss your credit score. When you have a low credit score, finding the right lender entails bringing up your strengths as well as your weaknesses, and understanding which lenders are willing to work with you.
More from NerdWallet:
Last updated on July 2, 2019
To recap our selections...
NerdWallet's 4 Tips for Finding the Best Bad-Credit Mortgage Lenders
- Vylla: Best for overall mortgage lenders for borrowers with low credit scores
- New American Funding: Best for overall mortgage lenders for borrowers with low credit scores
- Rocket Mortgage: Best for online mortgage lenders for borrowers with low credit scores
- Citibank: Best for refinance mortgage lenders for borrowers with low credit scores
- HomeBridge: Best for refinance mortgage lenders for borrowers with low credit scores