Bad credit home loans: mortgage options by credit score

How a mortgage with bad credit works

Bad credit has no legal definition. Each loan program sets its own score floor, and each lender may add an overlay on top, so the same score can be approved at one lender and declined at the next.

• Score floor: set by the program, raised by the lender
• Down payment: larger as the score falls
• Debt-to-income: monthly debts measured against gross income
• Credit events: bankruptcy and foreclosure add waiting periods

A lower score also raises the price. Rates run higher, and conventional PMI is priced by score, while FHA mortgage insurance is not, which is why FHA often costs less near the bottom of the score range.

Which programs each score band opens

Read the table by score band to see which programs usually start there. A lender's overlay can move any row up, so treat these as program rules, not promises.

Score bands matter most at their edges. The 580 line alone moves $16,250 of cash on a $250,000 home, as the next section shows.

What a lower credit score costs

Take a $250,000 home and three paths. FHA at a 580 score takes 3.5% down ($8,750) at the 6.89% FHA average; below that, 10% ($25,000). Conventional at 620 takes 3% ($7,500) at the 7.09% conventional average, plus PMI.

The 580 line is the biggest swing. Below it, FHA asks 10% instead of 3.5%, an extra $16,250 in cash, though the smaller loan lowers the payment to $1,600 from $1,726.

At 620, conventional costs at least $155 a month more than FHA at 580: $1,881–$1,931 a month against $1,726. That gap opens before the higher rate a low score usually pays, because PMI is priced by score and FHA's premiums are not.

What the monthly payment leaves out

The table prices every path at market averages, which assume solid credit. A weak score usually adds to the rate and, on conventional loans, to PMI, so real quotes near the bottom tend to land above these figures. Get several quotes on the same day, because overlays and pricing differ by lender.

Insurance length matters as much as its monthly cost. FHA premiums last the loan's life at 3.5% down but end after 11 years at 10% down, while conventional PMI can end at 80% loan-to-value. A low-score FHA loan is often a refinance candidate once the score recovers.

When a bad-credit mortgage goes wrong

Most bad-credit damage comes from the offer or the fine print, not from the score itself. Four risks deserve a hard look before you sign:

• Scam offers: guaranteed-approval pitches and fees demanded before a Loan Estimate
• Lender overlays: minimum scores set above the program's own floor
• Lifelong insurance: premiums that last the loan's life under 10% down
• Stretched budget: higher rates pushing payments toward debt-to-income limits

Fannie Mae's Selling Guide counts waiting periods from the discharge, dismissal or completion date, not from when the trouble began. It sets 4 years after a Chapter 7 discharge, shortened to 2 years with documented extenuating circumstances, and 7 years after a foreclosure, then expects credit to be re-established.

FHA vs. VA vs. USDA vs. conventional vs. non-QM

FHA, VA, USDA, conventional and non-QM loans all finance a home with imperfect credit. They differ in score floor, cash required and how long they make you wait after a bankruptcy or foreclosure.

Which route costs least depends on your score and cash, not the label. The minimum credit scores by loan type table lists every floor, and the credit score guide explains how lenders read your report.

Who a bad-credit mortgage fits

These paths fit buyers whose income is steady but whose score or credit history keeps them out of conventional approval.

• A score near FHA's floor with steady recent payments
• A veteran whose score falls short of conventional minimums
• A rural buyer within USDA income and area limits
• A borrower past a bankruptcy or foreclosure waiting period

Hold off if your score sits just below a cutoff: a few months of lower card balances can move you across the 580 or 620 line. Skip non-QM unless FHA, VA and USDA all fall through, because it costs more in rate and cash.

Bad-credit mortgages: pros and cons

What lenders weigh beyond the score

Underwriters accept a weaker score when the rest of the file is strong. They look for about two years of steady income, a debt-to-income ratio near 43% on FHA (up to 57% with compensating factors), and savings left after closing.

They read the report itself, not only the score. Recent late payments, collections and judgments hurt more than old ones, and a clean last year after earlier damage reads better than a middling score with new lates. Ratio benchmarks are 41% for VA and 41% for USDA.

Requirements at a glance

• Credit score of 580 or higher for FHA at 3.5% down (500 with 10% down)
• Conventional minimum of 620; USDA 640 for automated approval; VA lenders often 620
• FHA waiting periods of 2 years after a Chapter 7 discharge and 3 years after a foreclosure
• Debt-to-income near 43% on FHA, up to 57% with compensating factors
• Steady, documented income, usually a two-year history
• Cash for the down payment and closing costs, from savings or gift funds