Buying a house with bad credit is not impossible. When you have bad credit, mortgage options are limited, but they are still out there. The best way to move forward is to look past your credit score or a particular problem area on your credit report and assess your overall financial health.
While lenders are often constrained by regulations for certain loan types, particularly government insured loans, there can be some flexibility when you meet some requirements but not others. Be prepared to talk up your good points with a lender and point to improvements in your financial situation since a negative event, such as a charged-off credit account, occurred.
The 6 Best Bad Credit Mortgages
- FHA loan one: Best for low credit score holders with ready cash
- FHA loan two: Best for credit repairers
- VA loan: Best down payments for vets only
- New American Funding conventional loan: Best for the fair credit approach
- Quicken Loans: Best for higher debt-to-income ratios
- Citi HomeRun Mortgage: Best conventional loan down payment terms
|Mortgage Lender||Credit Scores Accepted||Down Payment Required||Max Debt-to-Income Ratio Allowed|
|FHA loan 1||500-580||10%||43%|
|FHA loan 2||580+||3.5%||43%|
|VA loan||N/A||None on mortgages up to $453,100||41%|
|New American Funding conventional loan||620||5% to 20%||43%|
|Quicken Loans conventional mortgage||620||3% to 20%||50%|
|Citi HomeRun Mortgage||640||3%||43% to 45%|
How to Buy a House With Bad Credit
When you want to buy a home, you quickly discover there are a lot of qualifications. Bad credit mortgage lenders and lenders who cater to an excellent credit score bracket both pull your credit reports and scores. Bad credit is typically expressed as a FICO score of 629 or below. Scores of 630 to 689 are considered fair.
In addition to examining scores, lenders look at your debt-to-income ratio or divide your total expenses — including the expense of the home you want to buy — by your gross income. A ratio of 36% is the gold standard, but lenders are willing to work with you up to 43% in most instances, and some companies will stretch it to around 50% for buyers with other qualities, such as a high income.
Many of the best subprime mortgages are insured by government programs through the Federal Housing Administration or Veterans’ Administration. These loans are processed by traditional lenders such as Quicken, Citi or Chase if you meet the requirements of the program. Otherwise, you will require a conventional loan with more flexible terms.
FHA Loan Options
Obtaining an FHA insured loan is a path many have followed to home ownership with both good and poor credit. The FHA insures a loan for a traditional lender, minimizing the risk to the lender, and thereby making it possible for a wider range of applicants to receive approval. But which FHA loan is best?
The first option targets the lowest credit range accepted by the FHA, 500-580. However, it requires a 10% down payment. For individuals with a questionable credit past but a bright financial future, the down payment investment may not be a hardship. If it would be difficult for you to come up with 10% toward your dream home, option two is the best. While it requires reaching a credit score of at least 580, the down payment requirement dips to 3.5%, allowing you to keep any extra cash handy for unexpected expenses.
Citi HomeRun Mortgage vs New American Funding Conventional Loan
Citi’s HomeRun Mortgage program provides an option outside of the FHA or VA to obtain a low down payment loan without mortgage insurance. While it accepts buyers with fair credit, the minimum credit score recommendation starts at 640. This makes the loan a home run for you when you are chipping away at the causes of your bad credit but are still struggling with cash flow. By comparison, the New American Funding conventional loan offers more flexibility, with down payment options ranging from 5% to 20% for buyers with a minimum credit score of 620. If your score trends toward the low end, however, it will be difficult to obtain a low down payment option on a conventional loan without a minimum debt-to-income ratio.
VA Loan vs Quicken Loans Conventional Mortgage
Veterans’ Administration loans are offered by most lenders, but they are only available to veterans with a certificate of eligibility. They require no down payment and do not have a credit score requirement. The VA states it guarantees part of the home loan against loss, which makes it possible for banks and other lenders to provide access to better loan terms. However, they do require a debt-to-income ratio of 41%. This can only be removed if the lender determines other factors make up for the higher ratio, such as better income. By contrast, the Quicken Loans conventional mortgage provides a maximum debt-to-income ratio of 50% in certain circumstances, making it easier for you to buy a home if you have more credit payments than preferred, such as multiple cars or credit cards, to secure financing.
The 6 Best Bad Credit Home Loans of 2020
FHA loan 1 — Best for low credit score holders with ready cash
It is easy for a credit score to dip into the 500’s, particularly for lower-income earners, the cash-strapped just leaving college or families recovering from major medical bills. A few late payments, maxed-out credit cards — even those with low limits — or an old account charged off can all send a credit score to the basement. In some instances, such as an old default or a brief rough patch with late payments, you may still have ready cash but find yourself unable to spend it on the home of your dreams. Scenarios like this are why FHA loans are popular, especially the loan option for credit scores of 500 to 580. If you can provide a 10% down payment, a few blips along the road do not have to hold you back as long as you have kept a responsible amount of debt compared to your income — 43% or less.
FHA loan 2 — Best for credit repairers
When you had a bad run with creditors or a lack of credit history to build a good score but are ready to embark on homeownership, the classic FHA loan is a great option. It only requires a 3.5% down payment. While the credit score requirement ups to 580, it still accommodates a significantly lower score than conventional loans and a down payment option only well-qualified conventional borrowers could typically attain. Even if you have the cash for a larger down payment, this loan option makes it possible for you to hold on to your money until you are settled in the house and have encountered all the unexpected expenses that come with new-home ownership. After you’re done with all that, you can make an extra payment of excess funds toward the principal.
VA loan — Best down payments for vets only
The VA loan is an exceptional opportunity for veterans to secure home financing with agreeable terms, even without the best credit. A VA loan does not have down payment requirements as long as a home is valued at $453,100 or below, and the VA does not require a minimum credit score. The primary specification is for a 41% or below debt-to-income ratio. However, this is also negotiable if there are other factors to offset the debt level. For example, a higher income buyer with a higher ratio may still have the excess capital to make monthly mortgage payments on a property even though debt-to-income is 42% or above. The VA loan is for you if you are veteran. Even if you don’t plan on staying in the home you’re purchasing for the long haul — if you move around a lot for work, for example — you can still take out a VA loan. This type of loan can be used multiple times and it will provide value time after time.
New American Funding conventional loan — Best for the fair credit approach
New American Funding is a middle-of-the-road conventional loan option for the fair credit crowd. If your score is around 620, you can receive access to a mortgage with down payment ranges from 5% to 20% and a debt-to-income ratio of up to 41%. If you describe your credit with a lot of “buts” — “My credit is good but not great,” “My debt to income ratio is not bad, but it could be better” — this loan may be just right for you. The further your credit is into the “good” range, the better your financing options will be. A lower APR can help you save money over the life of the loan, or you may opt for a fixed APR so you can plan your finances a bit better in the future. In this credit range and with this lender, you have a few loan options at your disposal.
Quicken Loans — Best for higher debt-to-income ratios
Quicken Loans and its Rocket Mortgage product help you connect with VA, FHA and other federal loan programs when you are eligible or require the help those types of loans provide. However, Quicken also offers conventional mortgage options with a bit of breathing room if your credit is less than stellar. A 620 minimum credit score is required on a conventional mortgage, along with a down payment of 3% to 20%. On its Zing! Information website, Quicken advises that a down payment greater than 5% should not be needed on a fixed-rate mortgage. Variable rate mortgages, however, may require more money up front, as do loans on investment properties. Quicken is a solid option for you if you are moving toward reestablishing good credit or inching up the FICO ladder for the first time. The Rocket Mortgage tool also makes it easy to explore your options as a first-time buyer.
Citi HomeRun Mortgage — Best conventional loan down payment terms
The Citi HomeRun Mortgage inches toward out-of-reach if you have bad credit, but is still a good option for those with bad items on the credit report but a fair score of 640. The real perk of the HomeRun Mortgage is finding a conventional loan option with a set low down payment of only 3%. This is lower than either FHA loan option and provides conscientious credit users with a bit of flexibility regarding how to invest limited extra dollars when buying a home. A debt-to-income requirement of 43% to 45% means you can have a car payment or some student loan or credit card debt without eliminating yourself from eligibility.
The Final Word
The best bad credit mortgage for you is the one that allows you to move into a home you love without overextending yourself into a situation where you further damage your credit. For those repairing after a rough patch, government-backed loan programs, such as the FHA loans, are a great way to invest in home ownership with better terms than you could likely obtain from a conventional loan. If you have repaired your credit enough to see a brighter future on the horizon, you may also be eligible for conventional loans, including special programs that help you hold on to more of your cash with reduced down payments. Always look for an option that provides a competitive APR and choose whether the predictability of a fixed mortgage or the potential savings of a variable rate is right for you.