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Best Home Loans for Bad Credit (2019)

You’ve dreamed of owning a home for some time. A place you can call yours. But what if you have bad credit? Can you still get a mortgage?  Are there home loans available if you have bad credit?

The answer is…yes (and no).

Here’s what this means:

Borrowers with excellent credit can expect to pay the lowest rates.

Borrowers with bad credit will have a tougher time. But that doesn’t mean you can’t find a lender or other solution.

Here’s the problem when you have bad credit:

  • You’ll need to try several lenders before you find something that works for you.
  • You’ll pay a much higher interest rate, in most cases

But, the good news is this:

  • You may qualify for government programs that offer low down payments
  • There’s an option called “Rent to Own”, which we get into later

How to Get a Bad Credit Home Loan

Now that you know what you’re getting into, let’s lay out a few options you have.

Some will work, while others may not be a good fit for you.

You’ll need to spend time and resources figuring out which bad credit home loan is right for you.

Loan Options Available

Here we discuss several loan options available if you have bad credit.

FHA Loan

What is an FHA loan? FHA stands for “Federal Housing Administration”.

The FHA’s primary goal is to provide insurance to approved lenders.

Lenders can then offer government-backed mortgages from the FHA to homeowners.

This process has given millions of homebuyers the ability to purchase a home — even if they have bad credit.

The great thing about this type of mortgage is, in most cases, you only need a 3.5% downpayment.

FHA Requirements

You’ll need to meet certain requirements as outlined by the FHA.

The requirements are:

  • You must be over 18 years of age
  • The home must be your primary residence
  • Your debt-to-income ratio must be less than 43%
  • To qualify for 3.5% down payment, you must have a credit score higher than 580
  • If your credit score is below 580, you’ll need 10% down
  • Mortgage Insurance Premium (MPI) required
  • You must have steady income and employment

You can read more about the FHA loan process here.

VA Loan

VA loans are mortgages guaranteed by the United States Department of Veterans Affairs. Active service members and military veterans can qualify.

With a VA loan, you don’t need a downpayment in most cases.

Note: in addition to being a veteran or active service member, you’ll need to meet certain credit and income requirements.

Further, you don’t need excellent credit to qualify. Home buyers with bad credit can still qualify. Keep in mind your down payment may need to be higher depending on your credit.

VA Loan Requirements

In order to be eligible for a VA loan, you must meet one or more of the following requirements:

  • Served 90 consecutive days during wartime, at a minimum
  • Served at least 6 years in the Army National Guard or Army Reserves
  • You’re a surviving spouse of a U.S. service member that died while in the line of duty or suffered a major disability
  • Provide prove that you have steady income and employment

Your lender may also have additional requirements. Such as: credit score, debt-to-income ratio, etc.  You can read up on more VA loan requirements here.


What is a USDA loan? This is a mortgage offered by the U.S. Department of Agriculture to lower-income families.

If you have low-income and plan to purchase a home in a rural or suburban area, this might be the mortgage for you.

A USDA loan also doesn’t require a down payment. That’s a zero percent down payment if you qualify.

As late as 2017, this program has helped over 127,000 families buy a home.

Also, this loan has very low-interest rates.

USDA Requirements

To be eligible, you’ll need to meet the following requirements:

  • Must be a U.S. citizen (or have permanent residency)
  • Your monthly payment must be 29% or less of your total monthly income
  • 24 months history of consistent income
  • Must have an acceptable credit history. A credit score of 640 or higher
  • If your credit score is below 640, you may have to go through additional screening

Note: Most home buyers have no idea the USDA loan even exist.


Do you have a close friend or relative that will co-sign for you? It’s not easy asking someone to co-sign for you.

Especially if you have bad credit.

But if you can prove to the co-signer that you have the ability to pay the monthly payment every month, you have a chance.

If you have the luxury of having a co-signer, you have a better shot at getting a traditional mortgage.

The problem is…

Few people are willing to co-sign for a 15-30 year mortgage on your behalf.

Rent to Own Home Options

Another strategy you can try is a rent-to-own program. This isn’t an option offered by the government or lenders. It’s a transaction that happens between home sellers and home buyers.

Rent to Own Home Requirements

  • Must have stable income and proof of employment
  • You may need a small down payment to show good faith
  • You may need an attorney to draft the legal papers. You can also find Lease-to-Own contract templates online

How Much Home Can You Afford?

A home is one of the biggest purchases you’ll make in your lifetime.

To know how much home you can afford, follow these simple steps.

  • Determine your budget. How much do you (and spouse or co-buyer if applicable) earn each month?
  • Most financial advisors agree: you shouldn’t spend more than 28 percent of monthly gross income on housing expenses.
  • Factor in your mortgage payment (including PPI), mortgage homeowner insurance, and annual property taxes.

How to Calculate 28% of Your Income

Multiply 28 by your monthly income. For example, if your monthly income is $5,000/mo, calculate that by 28. $5,000/mo x 28 = $140,000. Now divide this total by 100. $140,000 ÷ 100 = $1,400

Now you know, you have $1,400/mo to work with.

Average Credit Score Needed to Buy a Home (Bad Credit)

The average credit score needed depends on the type of loan.

For example:

FHA Loan – To qualify for 3.5% down payment, your credit score will need to be 580 or higher. Anything less and you’ll need 10% down payment

USDA Loan – The Department of Agriculture requires a credit score of 640 or higher

Co-signers – If you have bad credit, your co-signer should have good to excellent credit. A credit score of 700 and above is considered “good”.

Rent to Own Home – A home seller may request access to your credit score / history, but often do not. You simply need to show proof of income / employment. You’ll also need a downpayment, which consists of first, last and security deposit. However, each rent to own situation will be different, depending on the seller’s needs.

Tips to Improve Your Bad Credit Score

Having bad credit sucks. You end up missing out on great opportunities. And most important of all…you can’t get access to things that improve your qualify of life. A new home. A new car.

But there are steps you can take to improve your score. And thus, your quality of life.

You’ll want to start by getting out of debt.

Here are a few steps you can take to kick your credit score into high gear:

  • Create a monthly budget and stick to it. You can find budgeting templates here.
  • Cut out unnecessary expenses (eating out, entertainment expenses, subscriptions, etc).
  • Use a site like Credit Sesame or Credit Karma to find out your credit score and history (if you haven’t already)
  • Total up all your credit card debt. Use a spreadsheet. Filter your debt column by smallest to largest balances.
  • Start paying off your smallest debts first. Once a debt is paid off, take that and apply it to your next debt. This is known as the “Debt Snowball” method.
  • Instead of sorting your debts by smallest to largest balances, sort by APR or interest rates. Pay off your highest interest rate debt first. Then, move on to the next. This is known as the “Debt Avalanche” method
  • You can also calculate which credit card debt has over 33% credit utilization. Credit bureaus consider credit card debt over 33% to be excessively high. By paying these down first, your credit score may improve much faster.
  • Analyze your credit history report. If you see errors, dispute them.
  • And finally, stop using your credit cards. Accruing more debt will only keep you from attaining your goals.

Bonus:  Check out our guide on repairing your credit for free.

Do you have any tips for buying a home with bad credit? Let us know in the comments.

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