You should have a good credit score to enhance your chances of getting a mortgage, but there are plenty of ways to get approved — and even to keep your monthly payments and interest rates reasonable — with poor credit.
Typically, a “bad” credit score (by mortgage standards) is anything below a 580 or so. However, anything below a 670 is still merely considered “fair” and you’ll have a better chance at receiving an application approval and low interest quote if your credit score is above 700. Check your credit score to know where you stand.
Of course, you may still need or want to purchase a home even if your credit score is less than ideal. In that case, read on to find seven ways you can get a mortgage even with bad credit:
7 Ways to Get a Mortgage with Bad Credit
There are more ways to improve the strength of your loan application besides simply raising your credit score.
1. Make a Larger Down Payment
Typically, experts recommend a 20 percent down payment to lower monthly payments and avoid having to take out mortgage insurance, but it’s possible to put down less if you’re willing to pay more per month.
If you have poor credit, making a higher down payment will increase your likelihood of getting approved for a mortgage. You can even put down more than 20 percent, if you’re capable, which could somewhat offset your bad credit on your application and shorten the overall length of your loan.
2. Apply for Down Payment Assistance
If you don’t have enough saved to put 20 percent down on your loan, you may be able to apply for down payment assistance. There are four types of down payment assistance: grants, loans, loans with deferred payments, and loans that are forgiven over a set period of time.
- Forgivable, no-interest loans
- Deferred-payment, no-interest loans
- Low-interest loans that spread down payment over a period of several years
There are a number of requirements for down payment assistance (DPA), but if you qualify, having approved access to DPA can help strengthen your mortgage application even with lower credit. Before taking out an additional loan to cover the down payment and closing costs, carefully consider the additional monthly costs and how payments will affect your finances.
3. Demonstrate Your Cash Reserves
If you have extra savings available, it may be wise to keep it on hand instead of putting it toward your down payment. Demonstrating that you have excess funds can eliminate some of the concerns caused by bad credit — like the possibility that the applicant may miss loan payments if life gets in the way.
By demonstrating that you have a surplus of cash on hand, you’ll reassure lenders that you can be counted on to make your payments on time, even if your credit record suggests otherwise.
4. Use Supplementary Credit Data
Though your credit history may be poor, there are other ways to demonstrate that you’re a reliable borrowing candidate.
Things like rent history, cell phone bills, and utility payments aren’t included in traditional credit scoring models, but you can enroll voluntarily in programs that will recalculate your credit score with these alternative elements factored in. If you can demonstrate 12 to 24 months of consistent payments, enrolling in a program like Experian Boost, UltraFICO, or VantageScore could help raise your credit score immediately.
5. State Your Case
If there are extenuating circumstances that have led to your current low credit score, it may be worth letting the lender know. If you can write a letter or explain yourself in person, you may find the lender is more understanding than you anticipated.
If you had a health emergency, a long unemployment, or another documented reason for your earlier financial troubles, and if you can prove that those challenges have been resolved, you can make a convincing case for having your poor credit overlooked.
6. Use a Co-Signer
If your application isn’t strong enough on its own, you can strengthen it by having someone you know with better credit vouch for you as a co-signer. However, a co-signer will be financially responsible for paying your debt in the case that you default, so you’ll need to be able to convince your co-signer that you’re reliable, too.
7. Shop Around
The worst thing you can do when applying for any loan is accept the first offer you receive. There are many different types of mortgage lenders: banks, credit unions, online financial institutions, mortgage brokers, and more.
As long as you don’t allow any of the lenders you’re considering to run a hard credit check (which will damage your credit), you can shop around as much as you’d like in order to find the best mortgage for your credit range. Be sure to also consider specialized loans, like:
- FHA Loan: Issued by a lender approved by the Federal Housing Administration and only requires 3.5% down payment
- VA Loan: Reserved for military veterans and requires no down payment
- Fannie Mae HomeReady Mortgage: Enhanced affordable loan designed to serve borrowers with challenging financial situations
- Freddie Mac Home Possible Plan Mortgage: Designed specifically for low- and moderate-income borrowers
How Much Extra Will Low Scores Cost You?
Though you may be able to get approved for a loan with low credit, you’ll likely be paying more in interest than those who apply for the same loan with better credit. As a result, you’ll wind up paying more over the full life of the mortgage than you would with good credit.
Here’s a breakdown of how a $250,000 loan would vary depending on the borrower’s credit score, according to myFICO’s credit calculator tool:
Should You Wait to Raise Your Score?
As you can see in the chart above, a difference of just 20 points can result in over $10,000 more paid over the lifespan of a loan. A larger credit score difference can mean as much as $70,000 saved.
That’s why, if you can, it makes more sense to spend some time saving and improving your credit before applying for a loan. In just six to 12 months, you could raise your credit score by 50 or 100 points — which could translate to tens of thousands saved.
What About Rapid Rescoring?
If you do start making positive changes in your financial life, you can request what’s called a “rapid rescore” from your lender in order to have your score “refreshed” to include this new healthy financial behavior. You can’t request or perform a rapid rescore independently and not all lenders offer them, so be sure to inquire with your lender to see if rapid rescoring is an option for you.
If All Else Fails: Refinance Early
If you do need to take out a mortgage while you have low credit, you’ll likely experience penalties in the form of higher interest and monthly payments. That’s why you should start working to improve your credit right away, whether or not you intend to wait to apply for your mortgage — even if you already took out your loan, once your credit score has improved, you can refinance to get better loan terms.
As is the case with your initial mortgage, you’ll want to shop around for the best refinance offer possible. You’ll also want to start looking at refinancing options as soon as possible — the faster you raise your credit score, the faster you can lower your interest rate, and the less you’ll pay for your home. However, note that your refinancing agreement will come with closing costs and fees of its own, so it’s important to make sure that refinancing will actually save you money.
No matter how you decide to finance your home purchase, it’s always a good time to start improving your financial health. Whether you’re postponing your mortgage application to improve your credit or planning to refinance your high-interest loan early, stay on track to hit your budget goals. It’s never too late to start paying close attention to your financial health, improve your score, and take advantage of your new financial status.