Home Loans for Less than Perfect Credit: Loan Options to Consider
Last Updated: June 29, 2023

Home Loans for Less than Perfect Credit: Loan Options to Consider

Navigating the world of home loans can be a daunting task, especially if your credit score is less than stellar. While it’s true that having a low credit score can make it more challenging to secure a mortgage, there are options available to you. In this guide, we’ll explore loan options specifically designed for those with less than perfect credit, providing you with a roadmap towards homeownership.

Understanding Credit Scores

Your credit score is a three-digit number that lenders use to assess your creditworthiness. It ranges from 300 to 850 and is based on several factors, including your payment history, the amount of debt you have, and the length of your credit history. The higher your score, the more likely lenders are to approve you for loans at favorable interest rates.

Credit scores are typically classified as follows:

  • Excellent: 800 and above
  • Very Good: 740 to 799
  • Good: 670 to 739
  • Fair: 580 to 669
  • Poor: 579 and below

If your credit score falls into the ‘poor’ category, it may seem like homeownership is out of reach. However, don’t despair. There are still ways to secure a home loan. Let’s take a look at some of them.

1. FHA Loans

Federal Housing Administration (FHA) loans are government-insured mortgages that allow borrowers with poor credit scores to secure a home loan. With an FHA loan, you can have a credit score as low as 500, though you’ll need to put down at least 10% as a down payment. If your credit score is 580 or higher, you may qualify with a down payment as low as 3.5%.

FHA loans are popular among first-time homebuyers, mainly due to their lenient credit requirements and lower down payments. However, they do require you to pay for mortgage insurance, which increases the overall cost of the loan.

2. VA Loans

VA loans are another type of government-backed loan, this time from the U.S. Department of Veterans Affairs. These loans are available to veterans, active-duty military personnel, and certain military spouses. VA loans are particularly attractive because they offer no down payment and do not require private mortgage insurance (PMI), which can save borrowers a significant amount of money.

While the VA itself doesn’t set a minimum credit score for these loans, individual lenders might. Typically, a credit score of 620 or higher will give you the best chance of approval.

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3. USDA Loans

The United States Department of Agriculture (USDA) offers loans designed to help low-to-moderate income families purchase homes in rural areas. Like VA loans, USDA loans offer 100% financing, meaning you won’t need to save for a down payment.

While the USDA doesn’t set a minimum credit score requirement, most lenders prefer a score of at least 640. Keep in mind, however, these loans are geographically and income limited – you’ll need to buy a home in a designated rural area and meet specific income requirements.

4. Fannie Mae HomeReady Loan

The HomeReady loan program by Fannie Mae is another option for borrowers with bad credit. The program targets low-to-moderate income borrowers, allowing them to make a down payment as low as 3%. To qualify for a HomeReady loan, you’ll need a credit score of at least 620.

One unique feature of the HomeReady program is that it considers income from other household members, even if they aren’t borrowers on the loan. This can make it easier to qualify if you live with relatives or roommates who contribute to household expenses.

5. Non-Qualified Mortgage (Non-QM) Lenders

Non-QM lenders provide loans that don’t meet the strict eligibility criteria of a qualified mortgage but can be a viable option for those with a low credit score. These loans often require a larger down payment and come with higher interest rates to offset the risk posed by lending to borrowers with poor credit.

However, they offer flexibility with underwriting guidelines and can be a good option for those who can’t qualify for more traditional loan products.

6. Owner Financing

In some cases, the homeowner might be willing to finance your purchase, effectively acting as the lender. This arrangement, known as owner or seller financing, can be a viable option if you’re unable to secure a traditional mortgage due to poor credit.

With owner financing, you’ll make payments to the seller over an agreed period until you’ve paid off the purchase price plus any interest. Keep in mind that terms can vary greatly depending on the agreement between you and the seller, so it’s wise to have a real estate attorney review any contracts before you sign.

Improving Your Credit Score

While securing a home loan with bad credit is possible, improving your credit score can open up more options and potentially better loan terms. Here are a few strategies to boost your credit score:

  • Pay Your Bills On Time: Your payment history accounts for 35% of your credit score, making it the single most crucial factor. Make sure to pay all your bills on time to positively impact your score.
  • Reduce Your Debt: The amount you owe, or your credit utilization ratio, makes up 30% of your credit score. Try to pay down your debts, and avoid maxing out your credit cards to improve this ratio.
  • Keep Old Credit Accounts Open: The length of your credit history contributes 15% to your credit score. Even if you don’t use them regularly, keep your oldest credit accounts open to extend your credit history.
  • Limit New Credit Applications: Each time a lender checks your credit, it can lower your score slightly. Limit your applications for new credit and try to do all your loan shopping within a short period to minimize the impact of these inquiries


Having a low credit score can make the path to homeownership more challenging, but it doesn’t make it impossible. By exploring the loan options outlined above and taking steps to improve your credit score, you can find a path to homeownership that suits your needs.

Remember, every financial situation is unique, and what works for one person might not work for another. It’s always a good idea to speak with a financial advisor or mortgage professional to understand all your options. With careful planning and the right approach, owning a home can be within your grasp, regardless of your credit score.

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