Your credit is scored in a range from 300 to 850. Generally, a person is considered to have low or bad credit if their score is below 580. About 15% of American consumers have credit scores in the 500–599 range. While it can be hard to qualify for a mortgage, you can still experience the joys of homeownership even with a less-than-ideal credit score.
If You Are a First-time Buyer With Bad Credit, Can You Still Apply for a Mortgage Loan?
Yes! It’s entirely possible to get a mortgage with a poor credit score. The minimum credit score requirement depends on the mortgage type you’re applying for. Conventional loans use 640 as a general rule of thumb, but someone with a lower score can still be approved. FHA loans go even lower and will accept scores as low as 500, depending on how much the borrower can put down on the home. For VA loans, there is no minimum—the borrowers are reviewed in a different manner than with conventional or FHA loans. And for USDA loans, there is no minimum, but most lenders will require 640 or above.
Your credit score is a measure of your creditworthiness. It informs the lender of how likely you are to meet your financial obligations on time. A low credit score indicates that you have a poor history of handling credit and are less likely to repay money that you borrow than someone with a good credit score. As such, the lender is taking on a higher risk when lending you money compared to someone with a fair or excellent credit score.
Does Having a Negative Credit History Hurt You When Applying for a Mortgage Loan?
It's quite common for first-time homebuyers to have little to no credit history. If you haven't taken out a loan or used credit cards before, the lender has little information to go on regarding your credit history. It's the unintended consequence of living a debt-free life. But having a thin credit history shouldn't keep you from applying for a mortgage.
Several lenders accept buyers with no credit history as long as you can prove that you can afford the upfront costs of the mortgage and the monthly payments. For example, lenders will want to see:
A history of steady employment
Investment statements showing your assets
Savings for a down payment and closing costs
Cash reserves in case of an emergency
The rules may be somewhat strict, and you'll probably be required to put down a larger down payment, but it's possible to get approved if you find a willing lender. It's also a good idea to keep a record of your rent, utility, phone, and internet payments, as they're good indicators that you're capable of meeting financial obligations.
If You Are a Buyer With A Bad/Negative Credit Score With a Big Down Payment, Will Mortgage Lenders Approve Your Loan?
It depends. Mortgage lenders don’t just look at one factor when evaluating loan applications. To get the full picture of your financial capability, lenders will look at your debt-to-income ratio, income, and the size of your down payment.
That said, a sizeable down payment can increase your chances of getting approved for a loan. A larger down payment will considerably reduce the lender’s risk since they’ll be giving you a smaller loan—unlike if you borrow 100% of what the home is worth. Plus, a larger down payment demonstrates your commitment to the property, and you are more likely to pay your loan in full since you have more at stake.
What Can You Do to Fix Errors That Appear on Your Credit Report to Help Your Approval Odds?
Errors on your credit report can cause your scores to be lower than they should be. Cross-check the reports from the three credit reporting bureaus—Experian, Equifax, and Transunion—and dispute any errors you notice. The most concerning errors typically involve:
The wrong account status, like a missing payment on a bill you definitely paid off
Negative information that's too old to be reported; if it's been more than seven years, it's possible to get it knocked off your credit report
Accounts you don’t recognize or addresses where you’ve never lived
Incorrect loan balances
All three credit bureaus have an online dispute process. Simply gather the documentation that demonstrates your complaint is valid and file your dispute online. It's crucial to do this immediately when you notice an error, as errors can unduly affect your credit score and your chances of qualifying for a mortgage.
The Bottom Line on Bad Credit Home Loans
So, should you improve your credit score or get a mortgage now? A bad credit score doesn't automatically disqualify you when applying for a mortgage. Consider this: What will happen to interest rates in the months you’ll have to spend improving your credit? If they go up, you may not save any money, even with a better credit score.
The best thing you can do is to shop around with different lenders. You may hear a lot of no’s before finding a lender who's willing to work with you. It's entirely possible to get a home loan even with a bad credit score.
FAQ #1: Do you have to put a higher down payment if you have bad credit?
Not always, but it helps. Lenders will typically require a larger down payment if you have a low credit score, especially if you’re applying for a conventional loan. However, certain loan programs, like FHA or VA loans, allow you to use a smaller down payment, depending on other factors.
If you put less than 20% down, you may be required to pay for private mortgage insurance (PMI), which will increase your monthly payments. In simpler terms, it works in your favor to have a larger down payment. So, if you can comfortably put 20% or more down, you definitely should.
FAQ #2: Do first-time buyers with bad credit qualify for conventional loans?
Yes, you can qualify for a conventional loan with bad credit. Mortgage lenders have different risk appetites, and some are more than willing to work with borrowers with low credit scores. To compensate for this, you might be required to put down a larger down payment or pay higher interest rates. Interest rates are how lenders limit risk. You'll be charged a higher interest rate so that the lender can recoup more of the loan’s cost early on, just in case you end up defaulting.
FAQ #3: Can you qualify for a low mortgage rate even with bad credit?
No, that's unlikely. Bad credit indicates you have a poor payment history or demonstrate financial mismanagement; therefore, you pose a higher risk to the lender compared to someone with satisfactory or excellent credit. In fact, consumers who qualify for low mortgage rates tend to have a credit score of 700 or above, depending on the lender.
If you want to qualify for a low mortgage rate, take some time to improve your credit score. A low mortgage rate means your monthly payments will be lower, and you'll save more money over the loan’s life.