You can buy a home with a credit score below 620 through FHA loans (down to 500), VA loans (no minimum), USDA loans (typically 580-640), and now even some conventional loans after Fannie Mae removed its hard 620 cutoff.
Quick Facts About Low Credit Mortgages
| Loan Feature | Details |
|---|---|
| Lowest Possible Score | 500 (FHA with 10% down) |
| Most Common Minimum | 580 (FHA with 3.5% down) |
| VA Loan Minimum | No official minimum (lenders typically 580+) |
| USDA Loan Range | 580-640 (lender dependent) |
| Fannie Mae Change | No hard 620 cutoff as of November 2024 |
| FHA Down Payment | 3.5% (580+) or 10% (500-579) |
| Average Rate Difference | 0.5-1.5% higher than 740+ scores |
| Monthly Cost Impact | $165+ more per $400,000 loan |
Understanding Credit Scores and Mortgages
Your credit score determines which mortgage programs you can access and how much you’ll pay. Lenders use scores from 300 to 850 to assess your financial reliability. Scores below 620 fall into the “subprime” category, but multiple loan programs still accept you.
About 3.8% of mortgage dollar volume goes to borrowers with scores below 620. This proves homeownership remains possible even with credit challenges. The key is knowing which programs work with your specific score and financial situation.
How Credit Scores Affect Your Mortgage
Higher scores mean lower interest rates. A borrower with a 740 score pays roughly $165 less per month than someone with a 620 score on a $400,000 loan. Over 30 years, that difference adds up to $59,274 in extra interest payments.
Your score also affects your approval odds. Lenders approve conventional loans for 760+ scores at much higher rates than 620-639 scores. Government-backed loans give you better approval chances with lower scores.
FHA Loans: Down to 500 Credit Score
FHA loans accept the lowest credit scores of any major mortgage program. The Federal Housing Administration insures these loans, which reduces lender risk and allows them to work with borrowers who have credit challenges.
Credit Score Requirements
You can qualify for an FHA loan with a score as low as 500. The down payment requirement changes based on your score:
- 580 or higher: 3.5% down payment minimum
- 500-579: 10% down payment required
- Below 500: Not eligible for FHA financing
Most lenders set their own minimums higher than FHA’s floor. You’ll typically need at least 580 to get approved, though some lenders work with 500-579 scores if you meet other requirements.
FHA Loan Benefits
FHA loans offer several advantages for credit-challenged borrowers. You make a small down payment—just 3.5% with a 580+ score. Gift funds from family members can cover your entire down payment.
The debt-to-income ratio can go up to 43%, sometimes higher with strong compensating factors. This flexibility helps borrowers who have higher existing debts but steady income.
You can qualify for an FHA loan just two years after bankruptcy or three years after foreclosure if you’ve rebuilt your credit. Conventional loans typically require longer waiting periods.
FHA Mortgage Insurance
All FHA loans require mortgage insurance to protect lenders. You pay an upfront mortgage insurance premium of 1.75% of your loan amount at closing. This fee can be rolled into your loan balance.
You also pay annual mortgage insurance premiums between 0.15% and 0.75% of your loan amount, divided into monthly payments. On most FHA loans, you pay this insurance for the entire loan term.
If you make a down payment of 10% or more, mortgage insurance drops off after 11 years. This gives borrowers with 500-579 scores a path to eliminate the monthly insurance cost.
Qualifying with Low FHA Credit Scores
Lenders want to see compensating factors when your score falls between 500-579. Strong compensating factors include:
- Low debt-to-income ratio (below 35%)
- Significant cash reserves (6+ months of payments)
- Stable employment history (3+ years same job)
- Minimal debt outside the new mortgage
- Large down payment (15-20%)
You’ll work with a manual underwriter who reviews your complete financial picture. Automated systems often decline 500-579 scores, but human underwriters can approve them with sufficient compensating factors.
People also love to read this: Social Security Disability Insurance (SSDI) Eligibility
VA Loans: No Credit Score Minimum
VA loans don’t have an official minimum credit score. The Department of Veterans Affairs puts that decision on individual lenders. This creates opportunities for veterans and active-duty service members with credit challenges.
Lender Requirements Vary
Most VA lenders require 580-620 as their minimum score. Some lenders accept scores as low as 500 with strong compensating factors. Shop multiple VA-approved lenders to find one that works with your credit profile.
The VA manual underwriting guidelines allow for scores below any traditional minimum. Lenders can approve these loans by carefully reviewing your payment history, income stability, and overall creditworthiness.
VA Loan Advantages
VA loans require zero down payment regardless of your credit score. This eliminates one major hurdle to homeownership. You also avoid paying monthly mortgage insurance, which saves hundreds per month compared to FHA loans.
The VA funding fee ranges from 1.25% to 3.3% of your loan amount depending on down payment and service category. Disabled veterans receive full exemption from this fee.
Interest rates on VA loans typically run lower than FHA or conventional loans, even with the same credit score. This saves you money throughout your loan term.
Improving VA Loan Approval Odds
Focus on demonstrating stable housing and bill payment history. The VA wants to see you’ve paid rent and utilities on time, even if your credit score suffered from past issues.
Write a letter of explanation for any credit problems. Detail what happened, how you resolved it, and what you’ve done to prevent future issues. Veterans with documented financial hardships often receive favorable consideration.
Reduce your debt-to-income ratio before applying. Pay off credit cards, car loans, or student loans if possible. The VA typically wants to see ratios below 41%, though they can go higher with compensating factors.
USDA Loans: 580-640 Range
USDA loans help buyers in eligible rural and suburban areas. The U.S. Department of Agriculture backs these loans to promote homeownership in less densely populated regions.
Credit Score Requirements
The USDA doesn’t mandate a minimum credit score, but most lenders require 640 for automated approval. Scores between 580-639 receive manual underwriting consideration. Each lender sets their own thresholds within this range.
Borrowers with 640+ scores get streamlined processing through the USDA’s automated system. Lower scores require more documentation and manual review, but approval remains possible.
USDA Loan Benefits
USDA loans require no down payment. You can finance 100% of your home’s purchase price. This makes them accessible even if you have limited savings.
Mortgage insurance costs less than FHA loans. You pay a 1% upfront guarantee fee and 0.35% annual fee. These rates stay constant regardless of your credit score or down payment.
Interest rates compete with or beat conventional loan rates. USDA borrowing typically costs less than FHA over time due to lower insurance premiums.
Income and Location Limits
Your household income can’t exceed 115% of your area’s median income. This varies by location and family size. USDA sets these limits to help moderate-income families.
The property must sit in a USDA-eligible area. Many suburban communities qualify, not just rural farms. Check the USDA eligibility map before house hunting.
Conventional Loans: Fannie Mae’s New Policy
Fannie Mae eliminated its hard 620 credit score cutoff in November. This opens conventional loan access to borrowers with scores in the 500s if their overall financial picture looks strong.
The Desktop Underwriter Change
Previously, Fannie Mae’s Desktop Underwriter automatically declined any application with a score below 620. Now it evaluates your complete file regardless of score.
The system weighs multiple factors beyond your credit number:
- Payment history on rent and utilities
- Cash reserves and savings
- Employment stability
- Debt-to-income ratio
- Down payment size
Strong performance in these areas can overcome a sub-620 score. The change particularly helps first-time buyers and those with thin credit files.
Not a Guarantee
Fannie Mae’s policy change doesn’t guarantee approval for sub-620 scores. Individual lenders can still set their own minimums. Most banks and mortgage companies continue requiring 620+ for conventional loans.
The change means your application gets reviewed rather than automatically rejected. You’ll need compelling compensating factors to receive approval. Manual underwriters make the final decision based on your complete financial profile.
Benefits Over Government Loans
If you qualify for a conventional loan with a lower score, you might pay less in mortgage insurance. Conventional PMI drops off automatically at 78% loan-to-value ratio. FHA insurance typically lasts the entire loan term.
Conventional loans also offer purchase price flexibility. FHA, VA, and USDA all have loan limits. Conventional conforming loans go up to $806,500 in most areas for single-family homes.
Manual Underwriting Options
Manual underwriting gives you approval chances when automated systems decline you. A human underwriter reviews your application in detail rather than relying on computer algorithms.
When Manual Underwriting Helps
Manual underwriting works best when:
- Your credit score falls below 620
- You have limited credit history
- Recent credit problems have explanations
- You lack traditional income documentation
- Automated systems decline you
Underwriters look beyond your score to understand your full financial story. They evaluate your real ability to repay the loan based on income, assets, expenses, and payment history.
Building a Strong Manual Underwriting File
Document every aspect of your finances thoroughly. Provide 12-24 months of bank statements showing consistent savings. Include letters from landlords confirming on-time rent payments.
Show proof of on-time payment for utilities, insurance, phone bills, and other recurring expenses. These demonstrate responsibility even without traditional credit.
Write detailed explanation letters for any derogatory marks. Include supporting documentation like medical bills, divorce papers, or job loss notices. Underwriters want to understand what happened and see you’ve moved past it.
Alternative Credit Sources
Manual underwriting accepts non-traditional credit sources. These include:
- Rent payment history (12+ months)
- Utility payment records
- Car insurance premiums
- Phone or cable bills
- Childcare or tuition payments
You need 3-4 alternative credit sources showing 12+ months of on-time payments. This proves creditworthiness without traditional credit cards or loans.
People also love to read this: Critical Illness Insurance vs Disability Insurance
Credit Score Improvement Strategies
Raising your score before applying improves your approval odds and reduces your interest rate. Even small increases from 580 to 620 can save thousands in interest.
Pay Bills on Time
Payment history makes up 35% of your credit score. Pay every bill by its due date. Set up automatic payments to avoid missing deadlines. Even one late payment can drop your score significantly.
If you have past late payments, their impact fades over time. Focus on building 12-24 months of perfect payment history before applying for your mortgage.
Reduce Credit Utilization
Credit utilization accounts for 30% of your score. This measures how much of your available credit you’re using. Pay down credit card balances below 30% of your limits. Under 10% is even better.
Don’t close old credit cards even if you’re not using them. Keeping accounts open maintains your total available credit, which helps your utilization ratio.
Dispute Credit Report Errors
Get free credit reports from all three bureaus through AnnualCreditReport.com. Review them carefully for errors. Studies show 44% of consumers find mistakes on their reports.
Dispute any inaccurate information immediately. The bureaus must investigate within 30 days. Removing negative errors can boost your score quickly.
Common errors include:
- Accounts that aren’t yours
- Duplicate entries
- Wrong payment statuses
- Outdated negative items
- Identity theft accounts
Become an Authorized User
Ask a family member with excellent credit to add you as an authorized user on their oldest, best credit card. Their positive history reports to your credit file, potentially raising your score.
You don’t need actual access to the card to benefit. The payment history and low utilization alone help your score. Choose someone who always pays on time and keeps balances low.
Down Payment and Compensating Factors
Larger down payments improve approval odds when your credit score falls below 620. They show financial commitment and reduce lender risk.
Down Payment Benefits
Making a 10-20% down payment helps compensate for lower credit scores. Lenders approve these applications more readily because you have substantial equity from day one.
Larger down payments also reduce your loan-to-value ratio, which lowers your monthly payment and total interest costs. Some programs reduce or eliminate mortgage insurance with 20%+ down.
Other Strong Compensating Factors
Build 6-12 months of reserves after your down payment and closing costs. This emergency fund shows you can handle unexpected expenses without missing mortgage payments.
Keep your debt-to-income ratio below 36%. Lower ratios demonstrate you have room in your budget for the mortgage payment. Pay off credit cards, car loans, or student loans to reduce your DTI.
Show steady employment history. Two years in the same job or field proves income stability. Lenders worry less about repayment when you have reliable earnings.
Interest Rates by Credit Score
Your credit score directly impacts your interest rate. Lower scores mean higher rates, which increase your monthly payment and lifetime interest costs.
Rate Differences by Score
| Credit Score Range | Estimated APR | Monthly Payment* | Total Interest* |
|---|---|---|---|
| 760-850 | 6.50% | $2,528 | $509,280 |
| 700-759 | 6.75% | $2,590 | $531,840 |
| 660-699 | 7.00% | $2,653 | $554,880 |
| 620-659 | 7.50% | $2,782 | $601,440 |
| 580-619 | 8.00% | $2,914 | $649,440 |
| 500-579 | 8.50% | $3,048 | $698,400 |
*Based on $400,000 loan over 30 years
A 580 score costs you about $386 more per month than a 760 score—$139,000 extra over 30 years. Even improving from 580 to 620 saves $132 monthly and $47,520 total.
Shopping for Better Rates
Get quotes from at least three lenders. Different lenders offer different rates and work with different score ranges. Some specialize in borrowers with credit challenges.
Consider paying points to reduce your rate. One point (1% of loan amount) typically reduces your rate by 0.25%. This makes sense if you plan to keep the loan for several years.
Choosing the Right Loan Program
Match your credit score and situation to the best loan program. Each option has different requirements and benefits.
Decision Guide
FHA Loan If You:
- Have a credit score between 500-619
- Can make 3.5-10% down payment
- Don’t mind paying mortgage insurance
- Want flexible debt-to-income ratios
VA Loan If You:
- Qualify through military service
- Have any credit score (lenders typically want 580+)
- Want zero down payment
- Prefer to avoid mortgage insurance
USDA Loan If You:
- Have a 580-640 credit score
- Qualify by income (under 115% area median)
- Are buying in an eligible rural/suburban area
- Want zero down payment
Conventional Loan If You:
- Have a 580-620 score with strong compensating factors
- Can make 5-10% down payment
- Want PMI to drop off eventually
- Need a loan above government limits
Application Process for Low Credit Borrowers
Getting approved with a low credit score requires more preparation than standard applications. Follow these steps to improve your success rate.
Step 1: Check Your Credit Reports
Pull reports from Experian, Equifax, and TransUnion. Review them for errors and dispute any inaccuracies. Know exactly what lenders will see before you apply.
Identify any collections, charge-offs, or late payments. Prepare explanations for these items. Lenders want to understand what happened and how you’ve improved.
Step 2: Calculate Your Budget
Determine how much house you can afford. Use online calculators to estimate payments including principal, interest, taxes, insurance, and HOA fees.
Calculate your debt-to-income ratio. Add up all monthly debt payments (credit cards, car loans, student loans) and divide by your gross monthly income. Keep this below 43% for best approval odds.
Step 3: Save for Down Payment and Reserves
Build your down payment fund. FHA requires 3.5% with 580+ scores, 10% with 500-579. Save more if possible to improve approval odds.
Set aside 2-6 months of reserves after closing. These emergency funds demonstrate financial stability and compensate for lower credit scores.
Step 4: Shop Multiple Lenders
Contact 3-5 lenders who work with your credit score range. Not all lenders accept scores below 620. Ask about their minimum requirements before applying.
Compare rates, fees, and loan terms. Some lenders charge higher fees for riskier borrowers. Calculate your total cost including both interest rate and origination fees.
Step 5: Get Pre-Approved
Submit full documentation for pre-approval. This includes:
- Two years of tax returns
- Recent pay stubs (30-60 days)
- Two months of bank statements
- Photo ID
- Social Security number
- Employment verification
Pre-approval shows sellers you’re a serious buyer. It also reveals any application issues you can address before finding a house.
Step 6: Find Your Home
Work with a real estate agent familiar with low credit buyers. They understand which sellers accept FHA, VA, or USDA financing. Some sellers prefer conventional buyers.
Stay within your pre-approved price range. Avoid making offers that stretch your budget. Lenders verify your finances again at closing.
Step 7: Complete Underwriting
Respond quickly to underwriter requests. They may ask for additional documentation or explanations. Delays can jeopardize your closing date.
Don’t make major financial changes during underwriting. Avoid applying for new credit, changing jobs, or making large purchases. These can cause lenders to deny your application.
Common Mistakes to Avoid
Don’t apply with multiple lenders simultaneously. Each application triggers a hard credit inquiry, which temporarily lowers your score. Shop for rates within a 45-day window—these inquiries count as one.
Don’t skip the pre-approval step. Pre-qualification is much weaker than pre-approval. Sellers take pre-approved buyers more seriously.
Don’t assume you can’t qualify. Many people with scores below 620 successfully buy homes. Explore all your options before giving up.
Don’t ignore credit issues. Address collections, disputes, or errors before applying. Unresolved problems delay approvals and hurt your chances.
Don’t make large purchases before closing. Wait until after you own the home to buy furniture, appliances, or a new car. New debt can derail your mortgage approval.
State and Local Programs
Many states offer special programs for borrowers with credit challenges. These programs often provide down payment assistance, reduced interest rates, or flexible credit requirements.
Check your state housing finance agency for first-time buyer programs. Many accept lower credit scores and provide grants or forgivable loans for down payments.
Local housing authorities sometimes offer homebuyer assistance. These programs vary by city and county. Contact your local housing department for options.
Nonprofit housing counselors provide free guidance. HUD-approved counselors help you understand your options, improve your credit, and navigate the application process. Find counselors at HUD.gov.
Working with Credit Repair
Be wary of credit repair companies that promise quick fixes. Many use questionable tactics that can harm your credit further. Legal credit repair simply disputes inaccurate information—something you can do yourself for free.
Focus on legitimate credit building strategies:
- Pay all bills on time going forward
- Reduce credit card balances
- Don’t close old accounts
- Limit new credit applications
- Let time heal old issues
Most negative items drop off your credit report after seven years (ten years for bankruptcies). Payment history matters more than old issues that occurred years ago.
Timeline Expectations
Closing a mortgage with a credit score below 620 takes longer than standard applications. Manual underwriting adds 1-2 weeks to the process. Budget 45-60 days from application to closing.
Credit score improvements take time. Paying off collections might show results in 30-60 days. Building positive payment history requires 6-12 months of consistent performance.
Don’t rush the process. Applying before you’re ready leads to denial, which hurts your credit score and wastes application fees. Take time to improve your credit and save additional funds.
Can I get a mortgage with a 550 credit score?
Yes, you can potentially get an FHA loan with a 550 credit score if you make a 10% down payment. However, most lenders set their own minimums higher than FHA’s floor. You’ll need to find a lender specializing in low credit scores and present strong compensating factors like stable employment, low debt-to-income ratio, and significant cash reserves. Manual underwriting will be required, and you should expect higher interest rates than borrowers with better credit.
How long does it take to raise my credit score from 580 to 620?
Raising your score 40 points typically takes 3-12 months depending on your specific situation. If you’re paying down high credit card balances, you might see improvement within 30-60 days after the new balance reports. If you’re building new positive payment history, expect 6-12 months of on-time payments before reaching 620. Disputing credit report errors can provide immediate boosts if the errors are removed. Focus on paying all bills on time and keeping credit card balances below 30% of your limits.
What’s the difference between FHA and conventional loans for low credit scores?
FHA loans officially accept scores down to 500, while conventional loans typically required 620+ until recently. FHA loans charge mortgage insurance for the life of most loans, while conventional PMI drops off at 78% loan-to-value. FHA requires just 3.5% down with 580+ scores, while conventional loans need 5-10% minimum. FHA offers more flexible underwriting for credit-challenged borrowers. However, conventional loans may offer better long-term savings if you qualify because you can eliminate mortgage insurance.
Will applying for a mortgage with bad credit hurt my score more?
Multiple mortgage applications within 45 days count as one hard inquiry on your credit report, so shopping for rates won’t significantly damage your score. A single hard inquiry typically drops your score by 5-10 points temporarily. However, getting denied for a mortgage doesn’t directly hurt your credit—the inquiry already happened. Apply only when you’re reasonably confident you’ll be approved based on pre-qualification conversations. Avoid applying to numerous lenders outside the 45-day shopping window.
Can I use a co-signer to qualify with low credit?
VA, FHA, and USDA loans don’t allow co-signers in the traditional sense, but they permit co-borrowers who will live in the home or have ownership interest. Conventional loans sometimes accept non-occupant co-borrowers (essentially co-signers) who strengthen your application with their credit and income. The co-borrower becomes equally responsible for the mortgage. Their credit profile and debt-to-income ratio matter as much as yours. A co-borrower with excellent credit can help you qualify for better rates and terms.
