How to Buy a House With Bad Credit
Last updated: October 2026 · Editorial standards
“Bad credit” in mortgage terms doesn’t mean the same thing as “bad credit” in everyday language. Most lenders define bad credit as a score below 620. But programs exist for scores as low as 500 — and buyers with low scores are approved for mortgages every day.
The real questions are: which programs are available to you, what will they cost, and is buying now the right decision financially?
Credit Score Minimums by Loan Type
| Loan Program | Minimum Score | Down Payment Required |
|---|---|---|
| FHA loan | 580 | 3.5% |
| FHA loan | 500–579 | 10% |
| VA loan | No official minimum* | 0% |
| USDA loan | 640 (most lenders) | 0% |
| Conventional (Fannie/Freddie) | 620 | 3–5% |
| Non-QM / portfolio loans | 500–580 (varies) | 10–20% |
*VA has no official minimum, but most lenders impose a 580–620 floor.
The FHA program is the primary pathway for buyers with scores between 500 and 619. Below 500, mainstream mortgage options essentially don’t exist — building credit is the only realistic path.
What “Bad Credit” Actually Costs
A lower credit score doesn’t just determine whether you qualify — it significantly affects your interest rate, which affects your monthly payment and total interest paid over the life of the loan.
Conventional loan: $350,000, 5% down, 30-year fixed
| Credit Score | Approximate Rate | Monthly Payment | Extra Interest vs. 760+ |
|---|---|---|---|
| 760+ | 6.75% | $2,176 | — |
| 700–759 | 7.00% | $2,229 | +$19,080 |
| 660–699 | 7.50% | $2,340 | +$58,680 |
| 620–659 | 8.00% | $2,454 | +$100,440 |
FHA loan (all scores pay the same MIP rate — 0.55% annual): FHA rates also vary by credit score, but less dramatically than conventional. For buyers at 580–619, FHA often produces a better rate-PMI combination than conventional.
The cost difference between a 620 score and a 760 score on a $350,000 loan is roughly $100,000 in total interest over 30 years. This isn’t abstract — it’s real money that either stays in your pocket or goes to the bank.
FHA: The Primary Option for 580–619 Scores
FHA loans are the most practical option for buyers with credit scores in the 500s and low 600s. Key facts:
- 580+: 3.5% minimum down payment
- 500–579: 10% minimum down payment
- MIP: 1.75% upfront + 0.55% annual (lifetime for most loans)
- DTI: Up to 57% with compensating factors
- Manual underwriting: Available for 580+ borrowers who don’t get automated approval
The trade-off: FHA MIP is expensive and doesn’t cancel automatically. On a 30-year loan with less than 10% down, you pay 0.55% annual MIP for the life of the loan — adding ~$13,750 over 25 years on a $250,000 balance.
Manual Underwriting: When Automated Systems Say No
Automated underwriting systems (Fannie Mae’s Desktop Underwriter, FHA’s TOTAL Scorecard) use algorithms to approve or decline applications. A buyer with a 580 score who’s been rebuilding credit may be declined by the algorithm even if their overall financial picture is solid.
Manual underwriting is a human review process where an underwriter considers compensating factors:
- 12 months of on-time rent payments
- Low debt-to-income ratio
- Significant cash reserves
- Stable employment history
- No late payments in the last 12 months
Not every lender offers manual underwriting. Ask specifically when comparing lenders — it’s often the difference between getting approved and getting denied.
Non-QM Loans: Higher Cost, More Flexibility
Non-qualified mortgage (non-QM) lenders don’t follow Fannie/Freddie/FHA guidelines, which means they can accept lower scores and more complex financial situations. Products include:
- Bank statement loans: Qualify on 12–24 months of bank deposits instead of tax returns
- Asset depletion loans: Qualify on liquid assets divided over the loan term
- ITIN loans: For borrowers without Social Security numbers
- Credit event loans: Designed for buyers 1–2 years post-bankruptcy or foreclosure
Non-QM comes with trade-offs: rates typically run 1–2% higher than conventional, down payments are 10–20%, and terms vary widely by lender.
Steps to Improve Your Score Before Applying
Even a 3–6 month credit improvement push can meaningfully change your options:
1. Check for errors. Pull your free credit reports from annualcreditreport.com (all three bureaus). Dispute any inaccurate negative items — errors are more common than most people expect, and removing one can raise your score significantly.
2. Pay down revolving balances. Credit utilization (balances vs. limits on credit cards) is the second-largest factor in your score. Getting utilization below 30% — ideally below 10% — has an immediate scoring impact.
3. Don’t close old accounts. Length of credit history matters. Closing old cards reduces your available credit and shortens your average account age — both hurt your score.
4. Become an authorized user. If a family member with excellent credit adds you as an authorized user on their account, their payment history on that card may appear on your report. You don’t need to use or even hold the card.
5. Get a secured credit card. If you have limited credit history, a secured card (backed by a cash deposit) helps build payment history with on-time monthly payments.
6. Don’t apply for new credit. Each hard inquiry drops your score slightly. Avoid opening new accounts for at least 6 months before applying for a mortgage.
Is Buying Now the Right Decision?
This question matters beyond just eligibility. Buying with bad credit usually means:
- A higher interest rate (significant long-term cost)
- Lifetime FHA MIP if you can’t put 10%+ down
- Less negotiating power in competitive markets
If your score is 580–619 and you otherwise qualify, buying now may still make sense — especially if rents are high, you have a stable income, and you plan to stay in the home long-term.
If your score is below 580, a 6–12 month credit improvement plan is likely the better financial decision. The difference between a 560 and a 620 score isn’t just eligibility — it can save $50,000–$100,000 in total borrowing costs.
Frequently Asked Questions
Can I get a mortgage with a 500 credit score? Yes — with FHA and 10% down. You’ll need to find a lender willing to do manual underwriting at that score level, as many impose higher minimums. Expect a higher rate and MIP costs.
Does having a co-signer help with bad credit? A co-signer (or co-borrower) can help by adding their income to the qualification — but both your credit and theirs are considered. If your score is below the lender’s minimum, a co-signer’s excellent credit typically doesn’t bypass that requirement for FHA or conventional loans.
How long does it take to improve credit enough to qualify? Depends on the issues. A high utilization problem can be resolved in 30–60 days by paying down balances. A recent missed payment takes longer — lenders want to see 12 months of clean payment history. Collections or judgments may take 2+ years to stop heavily penalizing your score.
Will multiple mortgage applications hurt my credit? Mortgage rate shopping is treated as a single inquiry if done within a 14–45 day window (varies by scoring model). Apply with multiple lenders within that window to compare offers without multiplying the credit impact.
The Bottom Line
Bad credit is an obstacle, not a wall. FHA’s 500-minimum means genuinely accessible financing exists even with significant credit challenges — but the cost is real. The most powerful thing most buyers can do is spend 6–12 months improving their score before applying. Even a 40-point improvement can change both your eligibility and the long-term cost of the loan.
Next step: Ready to work on your credit? Read How to Improve Your Credit Score for a Mortgage for a specific, actionable improvement plan.
Sources
- FHA: Single Family Housing Policy Handbook 4000.1 — hud.gov
- Consumer Financial Protection Bureau: Credit Reports and Scores — consumerfinance.gov
- myFICO: Credit Score Ranges — myfico.com
Disclaimer: Credit score requirements and program terms change frequently. Verify current requirements with an approved lender. HomeFinanceLab.com is not a lender and does not originate loans.
