|Company||Min. Credit score (conventional)||Max. Debt to income ratio||Min. Advance payment||Closing days|
|Cherry Creek Mortgage
Ideal for VA loans
Best online option
Ideal for quick closing
Guide to choosing a mortgage lender with bad credit
Should you take out a mortgage if you have bad credit?
If you have bad credit, the suitability of taking out a mortgage loan depends on several factors. Your credit plays an important role in your ability to get a loan. If your score is too low, you may not qualify or you may have to accept a higher interest rate to get a mortgage.
Another thing to consider is the cause of your low credit score. If you have a history of missed payments, your budget may be too tight to buy a home, so it may be a good idea to delay buying a home for the time being.
Lenders will also look at your debt-to-equity ratio to determine how risky you are. If your debt-to-equity ratio is high, it may be difficult to get approved for a mortgage.
The state of the real estate market can also influence your decision. In some cases, it may be cheaper in the long run buy rather than rent. There are several considerations to make when determining whether buying or renting makes more sense in your area.
Improve your chances of qualifying with bad credit
You can improve your chances of qualify for a mortgage with these tips:
- Save a larger down payment: Although borrowers with excellent credit may qualify for a conventional mortgage with as little as 3% down, borrowers with poor credit may need a larger down payment. To give yourself the best chance of qualifying for a loan, aim to save 10% of the home’s value.
- Review your credit reports: Review your credit reports at AnnualCreditReport.com to see if there are any errors lowering your score. If there are any, dispute them with the credit bureaus.
- Repay the debt: You can improve your debt-to-equity ratio and your chances of getting a loan by paying off your existing debt, such as credit card balances.
- Apply with a co-signer or mortgagor: You may qualify for a mortgage if you add a co-signer to your loan application. Asking someone to be a co-signer is a huge ask, especially when it comes to a major purchase like a house, so make sure you can comfortably afford the loan repayments before going that route. .
How to Compare Mortgage Lenders
When looking for a lender, factors such as APR and type of interest rate are important. But if you have bad credit, you should also consider the following points to find the right lender for you:
- Minimum credit score requirements: Credit score requirements vary by lender. While some will work with borrowers with scores in the 500s, others require scores ranging from good to excellent.
- Debt-to-income ratio requirements: Typically, the maximum debt-to-income ratio that lenders will accept is 43%. However, some mortgage companies have higher DTI limits.
- Down payment conditions: If you have bad credit, you may need to save a bigger down payment than a borrower with excellent credit.
- Home Buying Assistance Programs: Many mortgage lenders have their own homebuyer assistance programs. Benefits may include lower credit score requirements, lower down payment percentages, or credits for closing costs.
How to Apply for a Mortgage
Typically, you can start the process through a mortgage lender’s website. Or if you need help navigating the app, you can contact an agent by phone or in person at a local branch.
When shopping for a mortgage, you can often pre-qualify to get an estimate of the price of the home you can afford. With a mortgage pre-qualification, the lender relies primarily on self-reported information.
With a pre-approval, the lender verifies your information and does a firm credit check, so it’s more accurate than a pre-qualification.
To apply for a mortgage, you will need to provide information and documents about your finances, including:
- Recent payslips
- Recent tax declarations
- Bank statements
- Investment account statements
- If you received a gift from a friend or relative for the down payment, a letter explaining the source of the funds
Frequently Asked Questions
What is a bad credit mortgage?
In general, lenders require a minimum credit score of at least 620 for most mortgages.
Borrowers who score below this number may struggle to qualify for conventional mortgages. However, they may qualify for other mortgage products with lower credit requirements.
For example, a popular bad credit mortgage is a FHA loan. Borrowers can qualify for an FHA loan with a score as low as 500.
What is a good down payment for a bad credit mortgage?
While borrowers with good credit may qualify for conventional mortgages with as little as 3% down payment, those with poor credit may need greater advance payment.
For example, FHA loans base the minimum down payment on the borrower’s credit rating. A borrower with a score of 580 and above can buy a home with just 3.5% down payment. But a borrower with a score between 500 and 579 must have a down payment of at least 10%.
What size mortgage can I afford?
If you’re like most Americans, buying a home is the biggest purchase you’ll ever make. One of the first things you will need to consider is how much house you can actually afford. This can be difficult to calculate, as many factors need to be taken into account, including your household income, existing debt, and your down payment.
Lenders will generally approve or deny an applicant based on their debt-to-income ratio (DTI). This ratio is calculated by dividing your monthly debts by your monthly income before taxes.
Mortgage lenders look at both your front-end and primary DTI. The initial DTI calculates how much of your gross income is spent on housing, while the primary DTI calculates how much of your gross income is spent on other debts, such as your credit cards or student loans.
Typically, mortgage lenders look for a DTI below 43%. However, some lenders have higher DTI requirements.
How We Choose The Best Mortgage Lenders For Bad Credit
Our team evaluated 45 mortgage lenders and collected nearly 1,500 data points before narrowing down our top picks. We weighted 15 criteria and assigned a higher weight to those with a more significant impact on potential borrowers.
Top picks were selected based on factors such as quality of service (50% weighting), operational characteristics (32%), loan types (12%) and affordability (6%). We took into account important considerations such as whether or not the lender offers jumbo loans, the number of states the lender is licensed in, and the overall customer experience.
We also conducted a survey of 1,195 people who had taken out mortgages. We asked about customer satisfaction with various mortgage lenders and learned which features are most important from a customer’s perspective. This information helped to determine the weightings of the criteria used for scoring.
Find out more in our Complete Mortgage Lender Methodology.