Buying a home with bad credit: Loan options, tips and how to qualify

Written by Samantha SheltonNMLS 1647301Updated October 2026

You can buy a home with a credit score in the 500s. FHA sets the lowest published floor of any mainstream program: 580 or above qualifies for maximum financing at 3.5% down, 500 to 579 is capped at 90% loan-to-value, meaning 10% down, and below 500 there’s no FHA-insured financing at all.¹

VA goes lower still, setting no minimum credit score at all, and Fannie Mae’s Selling Guide now requires no minimum for loans underwritten through Desktop Underwriter. But the gate you actually hit is rarely the agency rule. It’s the lender’s overlay sitting on top of it.

Learn how buying a home with bad credit works: which loan programs accept low scores, what compensating factors underwriters weigh in your favor, and which credit moves pay off fastest. New to all this? Start with our Mortgage Basics guide.

Key takeaways:

• FHA reaches lowest: A 580 score buys you in at 3.5% down, a 500 to 579 score requires 10% down, and under 500 you are ineligible for FHA insurance entirely.
• Your score sets your ceiling, not just your rate: HUD caps manually underwritten borrowers below 580 at 31/43 qualifying ratios with no compensating factors allowed, while a 580-plus borrower can stretch to 40/50 with two.
• The fastest lever is utilization: Amounts owed drive 30% of your FICO score and can move in one billing cycle, which beats almost anything else you can do in the 60 days before applying.

What counts as bad credit for a mortgage?

There is no single number. Each program publishes its own floor, and the four main programs disagree by more than 100 points. “Bad credit” is a program-by-program question, not a verdict.

Two mechanics behind that table matter more than the numbers. First, lenders pull all three bureaus and use your decision credit score: the middle of three, or the lower of two. Your best bureau does not carry the file, and neither does your average.

Second, the model matters. Fannie Mae requires classic FICO versions built on older formulas, Equifax Beacon 5.0, the Experian/Fair Isaac Risk Model V2, and TransUnion’s FICO Risk Score Classic 04. They predate the consumer-friendly changes newer scores adopted, so the number in your banking app is usually not the one your underwriter sees, and it’s often higher. Pull your free official credit reports and read the accounts instead of chasing an app score. For the full picture, see what’s a good credit score to buy a house and our Credit & Qualifying hub.

Which loan options work with bad credit?

Four programs are realistically in play below a 620 score, and they aren’t interchangeable.

Can I get an FHA loan with bad credit?

Yes, and FHA is the most forgiving mainstream option by a wide margin. At 580 or above you get maximum financing at 3.5% down; between 500 and 579 you’re capped at 90% LTV, so you’ll need 10%. On a $250,000 home in Waterford, that’s $8,750 versus $25,000 at closing, $16,250 of extra cash for the lower score.²

Every FHA loan carries mortgage insurance: 1.75% of the base loan amount upfront, plus an annual premium whose duration flips at exactly 90% LTV. At 90% or below it drops off after 11 years; above 90% it runs for the loan’s term. The 10%-down borrower forced there by a 540 score is, oddly, the one who eventually stops paying it. FHA also requires a Chapter 7 bankruptcy discharged at least two years, and a foreclosure or deed-in-lieu completed at least three.³ Read our FHA loan tips first, and HUD’s FHA loan overview for the program in HUD’s own words.

Can I get a VA loan with bad credit?

Often, yes, VA sets no minimum credit score at all. VA’s guidance is that lenders use your credit history to judge creditworthiness, and that any cutoff you hit came from the lender, not VA. Two lenders can decide the same 570-score veteran completely differently.

With full entitlement, a VA purchase loan requires no down payment as long as the sales price doesn’t exceed the appraised value, and carries no mortgage insurance of any kind. It does carry a one-time funding fee, a percentage of the loan amount set by how you use the benefit. Under the rates effective April 7, 2023, first use under 5% down is 2.15%, dropping to 1.5% at 5% down and 1.25% at 10%; subsequent use under 5% down is 3.3%. The fee is waived entirely for veterans receiving VA compensation for a service-connected disability, among other exemptions.⁴ You’ll need a Certificate of Eligibility either way.

Does a USDA loan work with a low score?

Sometimes. USDA’s Guaranteed program publishes no hard cutoff, but applicants at 640 or above meet its credit reputation standard and get a streamlined review; below 640, the lender must examine the whole credit history cautiously and in detail. A higher bar than FHA’s, in exchange for zero down on eligible rural property. Keep one distinction straight: Guaranteed loans come from a private lender with a USDA guarantee, under a household income limit generally set at 115% of area median income. Direct loans come from USDA itself, for low- and very-low-income households, under tighter limits and with a possible payment subsidy. Advice for one does not transfer.

Is a conventional loan possible below 620?

It can be. Fannie Mae’s Selling Guide no longer requires a minimum credit score for loans underwritten through Desktop Underwriter, which weighs the whole risk picture instead of applying one cutoff. Manual underwriting still requires 620 on fixed-rate loans and 640 on ARMs. Two cautions: most lenders keep a 620 overlay regardless, so agency flexibility only helps if your lender uses it, and conventional pricing runs off a grid combining score with loan-to-value, which is why down payment offsets part of a weak score.

What about portfolio and non-QM loans?

These are lender and investor products with no agency rulebook behind them. A portfolio lender keeps the loan on its own books and writes its own rules, so credit thresholds, reserves, down payments and pricing vary by provider. Get the terms in writing.

How to strengthen your application

Split your effort by timeline. Payment history is 35% of a FICO score and amounts owed are 30%: the lever you can’t undo, and the one you can fix this month. Length of history is 15%, new credit and credit mix 10% each, useful context for what makes up your FICO score.

Quick wins in the next 30 to 60 days

• Dispute report errors first: All three bureaus permanently offer free weekly reports through AnnualCreditReport.com, and errors are the only negative information anyone can legitimately remove.
• Pay balances down, don’t close cards: High utilization signals overextension, and a paydown posts at the next reporting cycle. Closing an old account shrinks available credit and shortens your history.
• Stop applying for anything else: New credit is 10% of the score, and a new loan or card lands in your debt-to-income ratio too.
• Ask about a rapid rescore: A mid-application paydown may post sooner than a full cycle, but ask before you pay so it’s documented the way the bureau needs.

Moves that take three to six months

• Build a clean payment streak: Nothing substitutes for consecutive on-time months. This is the 35% category.
• Build reserves: Documented reserves are one of the compensating factors HUD accepts to stretch FHA ratios at or above three total monthly mortgage payments on a one- to two-unit property.
• Cut your debt-to-income ratio: Retiring a small installment loan entirely often helps more than shaving a large one. See how debt-to-income ratio is calculated.
• Save toward a larger down payment: It shrinks the loan, counts as a compensating factor, and improves conventional pricing.

What to expect on collections and old derogatory accounts

Two facts save people real money. First, most negative information can be reported for seven years and bankruptcies up to ten, and that clock runs from the original delinquency, not from when the account went to collections. Placing it for collection again, or switching collectors, does not reset the date. Paying does not restart it either, and because mortgage underwriting uses those older FICO models, a paid collection can still weigh on your score.

Second, you may not need to pay everything off. On manually underwritten conventional loans, Fannie Mae doesn’t require non-medical collections and charge-offs cleared if an individual balance is under $250 or the total is $1,000 or less. FHA doesn’t require every collection paid either. Once non-medical collection balances reach a cumulative $2,000 or more, HUD Handbook 4000.1 gives the lender three choices: verify the debt is paid off at or before closing, use a documented payment arrangement, or count 5% of each outstanding balance as a monthly debt in your DTI. Ask your loan officer to price it both ways.

Major credit events carry fixed waiting periods no compensating factor overrides.

On the conventional side, Chapter 13 runs two years from discharge or four from a dismissal, and more than one filing in seven years extends the wait to five. Our guide to credit repair strategies for home buyers walks through the sequencing.

One warning: credit repair is regulated. Under the Credit Repair Organizations Act, a credit repair company cannot demand payment before delivering its services, the contract must be in writing, and you get cancellation rights. No company can remove accurate, current negative information or promise you a score by a date. The FTC has sued repeatedly over both.

How to choose a lender and document your file

With a low score, lender selection matters more than any other decision, because the agency floor and the lender’s floor are different numbers. Same program, same borrower, different answer.

Shop in a tight window. FICO ignores mortgage inquiries made in the 30 days before scoring, then counts multiple inquiries as one within a de-duplication window of 45 days on newer score versions or 14 days on older ones. Because mortgage lenders pull the older versions, keep applications inside about two weeks, or let a broker shop several wholesale lenders from one application, which collapses the question entirely.

Then over-document. Low-score files get read by a human, and humans read explanations.

• Write letters of explanation early: One per derogatory event, naming the cause, the date and what changed since, with proof attached.
• Show 12 months of on-time rent: Cancelled checks or bank debits carry real weight when the credit report is thin.
• Document reserves and gift funds: Sourced and seasoned, with the paper trail attached.
• Bring proof of stable income: Two years in the same line of work reads as durability, exactly what a weak score calls into question.

If tight income is also part of the picture, pair this with buying a home with low income, and see how your credit impacts buying a house.

What Michigan buyers should know

Michigan’s flagship first-time buyer program sits just above the FHA floor, making 640 a concrete target.

• MI Home Loan requires a 640 minimum credit score: The Michigan State Housing Development Authority’s program is open to first-time buyers statewide and repeat buyers in targeted areas, and requires homebuyer education. If you’re at 590 today, 640 is the number that unlocks Michigan-specific help.
• The MI 10K DPA Loan provides up to $10,000: A 0% non-amortizing second mortgage toward down payment, closing costs and prepaids, with no monthly payment, repaid when you sell, refinance, pay off the first mortgage or stop living in the home.
• The sales price limit is statewide; the income limit is not: MSHDA caps the purchase price at $566,355 statewide after June 1, 2026, while household income limits vary by county and family size. Both reset periodically, so confirm current figures at michigan.gov/mshda before building a plan around them.

Because Align is a broker, we can place MSHDA, FHA, VA and USDA financing through partner lenders and compare them side by side on the same file.

Another lender said no. Can a broker give you a useful second opinion?

Often, yes, as long as you know what kind of no you got. The first step is the reason, in writing.

Get the reason on paper

Under the Equal Credit Opportunity Act, a lender that turns down a completed application must tell you within 30 days. The notice must state the specific reasons, or tell you how to ask for them (Regulation B, 12 CFR 1002.9). If a credit score played a part, federal law also requires the notice to show the score and the main factors behind it. Keep that letter. It is the starting point for any second look.

Which kind of no was it?

What a second review cannot do

It cannot remove accurate negative items from your credit report. It cannot shorten a waiting period. And nobody can promise an approval before full underwriting. Be wary of anyone who says otherwise, including credit repair companies that ask for money up front.

What to bring

Bring the denial notice, a copy of your credit report and any Loan Estimate you received. Those papers usually show which kind of no it was before anyone pulls your credit again. Aiming for MSHDA’s down payment help? Its minimum score is 640, and a second review should tell you how far away you are.

Align is a small, owner-run brokerage in Waterford, with no call center between you and the person doing your loan. Samantha reads your file herself and places FHA, VA, USDA, conventional and non-QM loans, so a file one lender declined can be priced against several others. See credit repair strategies for home buyers.

FAQ: Buying a home with bad credit

Here are answers to common questions about buying a home with bad credit.

What is the lowest credit score to buy a house?

The practical floor is 500, using an FHA loan with 10% down; at 580 the FHA down payment drops to 3.5%. VA loans have no official minimum, though lenders usually set overlays around 580 to 620. Conventional loans generally start at 620 unless approved through automated underwriting. Below 500, focus on credit repair first. See what counts as a good credit score to buy a house.

How can I raise my credit score fast before applying?

Start by pulling your free reports at AnnualCreditReport.com and disputing any errors, which can produce quick gains. Then pay card balances below 30%, ideally under 10%, of their limits, ask for credit-limit increases, keep old accounts open, and avoid new applications. Becoming an authorized user on a well-managed card can help within a billing cycle or two. Our credit repair strategies for home buyers puts these in order.

Do I need a bigger down payment with bad credit?

Sometimes it’s required, FHA demands 10% down for scores between 500 and 579, and it’s often smart even when it isn’t. A larger down payment lowers the lender’s risk, can improve your pricing, and acts as a compensating factor alongside stable income and reserves. It also shrinks the loan, offsetting part of the higher rate. Compare that against low-income buying programs before you drain your savings.

Will applying with multiple lenders hurt my credit?

Not meaningfully, if you shop within a focused window. Scoring models count multiple mortgage inquiries made within roughly a 14-to-45-day period as one, because they recognize rate shopping, and a single hard inquiry typically costs a few points. The savings from comparing offers, or letting a broker shop lenders for you at once, far outweigh the temporary dip. Our Credit & Qualifying hub covers what else underwriters check.

The bottom line on buying a home with bad credit

Buying a home with bad credit is a program-matching problem before it’s a credit problem. FHA takes you to 580 with 3.5% down and to 500 with 10% down; VA publishes no minimum score at all; USDA Guaranteed treats 640 as its credit reputation standard; and Fannie Mae no longer applies a minimum to Desktop Underwriter casefiles, though manual underwriting still requires 620. The number that decides your file is your lender’s overlay, which is why a low score is the strongest argument there is for shopping more than one.

If you’re ready to find out which lenders will say yes to your file, talk to Align Lending. We’ll shop your scenario across our lender network, including flexible-credit programs, and show you the numbers side by side. Call 248-506-5727 or start online today.

Footnotes:

1. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA minimum decision credit score and loan-to-value requirements are set by HUD and are subject to change. Return to text.

2. Example figures in this article are hypothetical and for educational purposes only; they do not constitute an advertisement of credit terms or a rate quote under federal or state lending laws. Your down payment, mortgage insurance, rate and terms will depend on your application, your credit, the property, and market conditions. Return to text.

3. Align Lending is not acting on behalf of or at the direction of FHA or HUD. FHA waiting periods and mortgage insurance premium rules are set by HUD in Handbook 4000.1 and its appendices and are subject to change; individual lenders may apply stricter requirements. Return to text.

4. Align Lending works with VA-approved lenders and is not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency. VA funding fee rates, exemptions and eligibility requirements are set by VA and are subject to change; confirm current rates at va.gov. Return to text.

Figures current as of August 2026; verify with the linked source before relying on them. Program figures on this page come from federal agency and government-sponsored enterprise rulebooks that are revised on their own schedules.

Sources: minimum decision credit score of 580 or above for maximum FHA financing, 500 to 579 limited to 90% LTV, and ineligibility below 500, HUD Mortgagee Letter 10-29 and FHA Single Family Housing Policy Handbook 4000.1. FHA manual underwriting maximum qualifying ratios of 31/43, 37/47 with one compensating factor and 40/50 with two, the 31/43 cap for scores below 580, and cash reserves equal to or exceeding three total monthly mortgage payments as a compensating factor, HUD Handbook 4000.1. FHA upfront mortgage insurance premium of 1.75% of the base loan amount and annual premium duration of 11 years at LTV of 90% or less versus the mortgage term above 90%, HUD Handbook 4000.1, Appendix 1.0. FHA waiting periods of two years from Chapter 7 discharge and three years from a completed foreclosure or deed-in-lieu, HUD Handbook 4000.1. VA does not require a minimum credit score and lenders may impose their own, no down payment when the sales price does not exceed the appraised value, no private mortgage insurance or mortgage insurance premium, Certificate of Eligibility requirement, and purchase funding fee rates effective April 7, 2023 of 2.15%, 1.5% and 1.25% for first use and 3.3% for subsequent use under 5% down, with exemption for veterans receiving VA compensation for a service-connected disability, U.S. Department of Veterans Affairs (va.gov). No minimum credit score required for Desktop Underwriter loan casefiles, 620 minimum for manually underwritten fixed-rate loans and 640 for ARMs, 620 minimum representative credit score on government mortgage loans, decision score determined as the middle of three or lower of two, and required classic FICO versions (Equifax Beacon 5.0, Experian/Fair Isaac Risk Model V2, TransUnion FICO Risk Score Classic 04), Fannie Mae Selling Guide B3-5.1-01 and B3-5.1-02. Non-medical collections and charge-offs on manually underwritten loans not required to be paid off when an individual balance is under $250 or the total is $1,000 or less, Fannie Mae Selling Guide B3-6-07. Conventional waiting periods for Chapter 7 and 11 bankruptcy, Chapter 13 bankruptcy, multiple filings, foreclosure and deed-in-lieu, Fannie Mae Selling Guide B3-5.3-07. USDA Single Family Housing Guaranteed credit score of 640 meeting the credit reputation standard, cautious underwriting below 640, and the distinction between the Guaranteed and Section 502 Direct programs, USDA Handbook HB-1-3555, Chapter 10. Negative information reportable for seven years and bankruptcies for up to ten, Consumer Financial Protection Bureau; the delinquency date not being reset by placement for collection or by a change of collector, Federal Trade Commission furnisher guidance under the Fair Credit Reporting Act. Permanent free weekly credit reports from all three nationwide bureaus at AnnualCreditReport.com, and the prohibition on advance fees and on promises to remove accurate negative information under the Credit Repair Organizations Act, Federal Trade Commission. FICO score category weights of 35%, 30%, 15%, 10% and 10%, and the 30-day inquiry buffer with a 45-day de-duplication window on newer score versions and 14 days on older versions, myFICO. FHA capacity analysis triggered by cumulative non-medical collection balances of $2,000 or greater, and the three lender options including counting 5% of each outstanding balance as monthly debt, HUD Handbook 4000.1. MI Home Loan minimum credit score of 640, first-time buyer statewide and repeat buyer targeted-area eligibility, homebuyer education requirement, statewide sales price limit of $566,355 after June 1, 2026, county- and family-size-based income limits, and the MI 10K DPA Loan of up to $10,000 as a 0% non-amortizing second mortgage, Michigan State Housing Development Authority (michigan.gov/mshda).

This article is for informational purposes only and is not intended to provide legal, financial, or tax advice. Credit score requirements, program guidelines, mortgage insurance rules, funding fees, and down payment assistance terms change and vary by lender, program and property; confirm your figures with your loan officer and the program administrator, and consult a qualified professional about your situation. Figures shown are illustrative, are not a rate quote or an offer of credit, and are subject to change. Align Lending is an independent Michigan mortgage broker, NMLS #2041154.

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