How to get a mortgage with bad credit and a low credit score

If you have bad credit and a low credit score, it is not the end of the world when it comes to getting a mortgage. You may still have options when it comes to obtaining a mortgage, to either buy a home or refinance your mortgage. But, please keep in mind that your options will be limited to only a select handful of lenders who have loan programs that cater to borrowers with less than stellar credit.

If your credit score is below 650 or you have a recent bankruptcy or foreclosure, then most likely you will not be able to qualify for what is called a conventional mortgage such as 30 year fixed rate prime loans. However, you may be able to get approved for the Federal Housing Administration (FHA) 30 year mortgage loan with a credit score as low as 580, and sometimes even as low as 500, if you can come up with a 10 percent down payment to qualify for an FHA loan.

There are also quite a few alternative private and hard money lenders who offer loan programs that cater to borrowers with less than stellar credit and/or have a recent foreclosure and bankruptcy, which I will cover below in this article.

FHA Mortgage Loans

A FHA loan can help you finance your own property, regardless if you have bad credit because these mortgages are backed by the federal government. Even if you have ran into extreme road blocks in the past and have had other debts sent to collections, filed bankruptcy, or have high debt, you may still be eligible for a mortgage through the FHA. These mortgages can be very beneficial, especially for those with very little money to put towards a down payment on the property.

The FHA strives to make homeownership possible for more Americans who do not necessarily qualify for a conventional loan from a traditional bank or lender. Through the FHA, you do not need outstanding credit history or a high-paying career to qualify for a mortgage. These loans are often much more accessible to to prospective buyers because the down payment will be much smaller than a conventional loan, and the terms and monthly payment may not exceed your local rents.

Although FHA offers mortgage opportunities that conventional lenders don’t offer, there are certain credit scores that just can’t get you a loan. Regardless, people with credit scores that range from 580 to 620 can qualify for FHA mortgages. To the FHA, people who can demonstrate wise money managing strategies who have endured a recent hardship event, deserve a second chance. The FHA are also more fluent to instruct borrowers on never spending over 30% of their household income on monthly mortgage payments.

Another factor to keep in mind is that you cannot obtain financing on any loan amount. FHA loan limits will generally vary from state-to-state and, while in some areas the maximum loan amount is around $271,000, in high value areas the max FHA loan amount can reach $625,000 to $729,500. Multi-unit properties will be higher than single-family homes and will also vary by state/area.

How does credit history affect my chances of qualifying for an FHA mortgage?

Generally, the FHA is much more flexible with their guidelines than traditional mortgage lenders. In fact, you may be able to qualify for this type of mortgage even if you had a bankruptcy discharged two or more years ago, past judgements have been paid off, any tax liens have been paid off or you have made payment arrangements with the IRS, or even if you have previously went through foreclosure or deed in lieu three years ago. Even if you have no credit history at all and have always preferred to pay debts in cash, the FHA may have programs available, and there are other ways you can prove your eligibility.

What if I have had a recent bankruptcy, foreclosure or short sale?

The FHA back to work program allows a borrower the ability to purchase a new property a year after the economic event, whatever occurred; foreclosure, short-sale, bankruptcy or a multitude of the three. It doesn’t have any specific restriction. You can have a bankruptcy and a foreclosure and still qualify, but there is a very strict qualifying criteria behind it.

What steps and information is required to obtain an FHA loan?

The first thing you need to do when seeking a mortgage, is to complete a mortgage application. You will need to provide pay stubs for the past 2-3 months, W-2 forms for the past 2 years, information on any other long-term debts, most recent bank statements, most recent two years tax returns, address and description of the property you wish to buy, and the sales contract. The application process can range anywhere from 1-6 weeks, and during this time the bank will review your credit history and order an appraisal for the home you wish to finance.

Are you a first-time home buyer?

If you are a first-time home buyer, an FHA mortgage is generally always a good solution to turn to. The down payment for this type of mortgage can be as little as 3.5% of the purchase price, and also some of the closing costs and fees associated with the loan may be included in the balance. Be aware that loans with less than a 20 percent down payment will typically require a mortgage insurance policy to secure the property.

However, the applicant must be able to meet standard qualifications and can be eligible for up to 96.5% financing on one-to-four unit structures. Here you can learn more about mortgage limits in your area.

Other lenders who offer mortgages to borrowers with bad credit

There is a lender I work with that has a mortgage program which allows people to purchase with 20-30% down, and it has a minimum loan size of $300,000. Basically, what that would factor into is about a $430,000 purchase or more. These loans are not fixed rate 30 year mortgages.

They are only fixed for five years, which makes these loans an Adjustable Rate Mortgage (ARM). But, they have great rates and they are fixed for five years allowing the borrower to improve their credit. For example, I recently closed a mortgage for a borrower at 5.125%. This will get them into the house now, and then they can work on that going past the seasoning period to take care of it in the future.

Find out more about your credit score and history 

First of all, your credit score is just one factor that determines whether you can get a loan or not. Your credit score is determined by Fair ISAAC & Company (FICO), the leading credit reporting agency. FICO knows whether you have a bad credit history or not.

FICO cannot reveal how they compute your credit score as decided upon by the US Congress. However, if your FICO score is higher, you have a better chance of getting a mortgage loan. You can also be offered lower interest rates. But, if your FICO score is lower than 500, your chances of getting a mortgage loan are very slim.

When your credit score is around 500-600, you can still get a mortgage loan. That is if you are willing to make a down payment. Lenders are still willing to give you a chance to get a mortgage loan, but the interest rates may be higher than you expected. One more thing, the down payment may need to be a very substantial amount (sometimes 20% or more).

Improving your credit score can be of help. You can consult a mortgage broker to help you. Mortgage brokers can give you tips on how to increase your credit score, and there are several programs that you can use to improve on your credit score.

Most people are aware of the three major credit bureaus: Equifax, Experian, and Trans Union. Obtaining a copy of your credit report is fairly simple and the FTC allows you to obtain one free copy of your credit report per year. In fact, is the ONLY authorized source for the free annual credit report that’s yours by law.

The Fair Credit Reporting Act guarantees you access to your credit report for free from each of the three nationwide credit reporting companies — Experian, Equifax, and TransUnion — every 12 months. The Federal Trade Commission has received complaints from consumers who thought they were ordering their free annual credit report, and yet couldn’t get it without paying fees or buying other services. TV ads, email offers, or online search results may tout “free” credit reports, but there is only one authorized source for a truly free credit report.

After you get a copy of your free credit report it is essential you ensure there are no mistakes and everything has been reported accurately. You may want to obtain a copy from all three credit bureaus because sometimes accounts may be reported differently on the various bureaus. Make sure that loan amounts, credit limits, and any past due payments have all been reported correctly.

Credit laws allow you to request that the credit bureaus investigate any information on your credit report that you feel has not been reported correctly or may be incomplete. The Fair Credit Reporting Act (FCRA) makes this accessible and at no cost to the consumer, so always be wary of credit companies offering to do this before you attempt to do so yourself.

More tips to help your qualify for a mortgage

First and foremost don’t miss any payments on any of your debt, whether it’s credit cards, another mortgage, whatever it may be. Make sure you’re very diligent about paying the bills on time. Especially with the FHA back to work program, if you’ve got a delinquency after the economic event, in most cases that borrower would be denied. Improve, improve, improve the scenario as much as you possibly can.

If a mortgage company is not willing to give you a loan, there are other lenders out there that can still offer you a loan. Not all lenders have the same criteria in choosing which individuals to approve. It is helpful to ask a mortgage broker for help in getting the best offers and rates.

Find the right lender for you:

You will always want to make sure you carefully choose your lender. Always make sure to do your research to locate a reputable lender, and if possible, try a local lender because it may be easier to keep track of your application and sit face to face with a rep if any questions may arise.

Important Links and Resources:

Read more about FHA loans on LoanSafe

Find FHA lenders in Your Area

Contact a HUD Housing Counselor

Research State and Local Government Programs to Help Assist With Your Down Payment 

Find Local FHA Homebuyer Programs in Your State  


Erik Sandstrom

Erik Sandstrom

Loan Officer

Hi, my name is Erik Sandstrom. I’m a proud sponsor and mortgage expert on I’m also a sale’s manager and loan officer with Caliber Home Loans. If you are looking for a great mortgage with the best rates or for a great company to work for, please call me direct at 619-379-8999 or email me at [email protected].