How to Qualify for a Mortgage Loan with Bad Credit

The specific minimum credit score required can vary depending on the lender and the type of loan. Conventional loans typically demand a minimum credit score of 620, while government-backed loans tend to have more lenient credit score requirements.

If your credit score falls below 500, obtaining a mortgage may prove challenging, and it would be advisable to prioritize efforts towards increasing your score beforehand.

Is it Possible to Purchase a House with Poor Credit? 

When it comes to credit scores, having anything below a 670 FICO® Score is typically considered "subprime" by Experian™, one of the leading credit bureaus. Within the subprime range, Experian further distinguishes between fair scores, ranging from 580 to 669, and poor scores, encompassing anything below 579.

If you find yourself with bad credit, having cash on hand can be extremely beneficial, particularly when it comes to making a down payment. The reason behind this is that your credit score might only qualify you for a limited mortgage loan amount. However, if you can bridge the gap with cash, you still have the opportunity to afford the home you desire.

Additionally, the specific lender you work with will also impact your options, as each lender has its own set of requirements. While it is possible to obtain a loan with bad credit, it is crucial to be prepared for higher monthly mortgage payments due to elevated interest rates.

If you're unable to secure a mortgage due to bad credit, there are alternative options worth considering. The most suitable choice depends on the severity of your low credit score. For scores below 600, FHA loans or VA loans may be worth exploring.

Ideally, the best course of action is to focus on improving your credit score before applying for a mortgage. While this may not be the desired solution, it is a practical approach that can save you significant amounts in interest payments. Not only will you have a wider range of mortgage options, but you may also qualify for lower income requirements and down payments.

Here are several options to consider if you're unable to obtain a bad credit mortgage:

1. Increase Available Credit 

Taking steps to improve your score and accelerate its growth can involve increasing your available credit. This can be achieved by paying down balances or requesting credit limit increases. By reducing your credit utilization, a key factor in determining your score, you can raise your creditworthiness. It's important to note that most credit card companies allow multiple credit limit increase requests without triggering a hard credit inquiry.

2. Bulk Addition of New Accounts 

Adding new accounts not only boosts your available credit but also diversifies your overall credit mix. Opting for a bulk addition of new accounts is advantageous because it consolidates activities within the same timeframe. As a result, inquiries, new accounts, and increased available credit will all align, while contributing to a stronger payment history. Typically, the effects of adding bulk new accounts to your credit report can be observed within 30 to 45 days.

3. Negotiate Deletion of Negative Items 

Collections on your credit report can significantly impact your creditworthiness, indicating unpaid debts. While paying off collections results in a "Paid" status, the optimal outcome is to request their deletion entirely. Ensure you obtain written confirmation of the agreement to remove these items from your credit report. Such deletions can improve your credit score, removing one more reason for lenders to decline your application.

4. Minimize Hard Credit Inquiries 

Applying for new credit can result in hard inquiries that negatively affect your credit score. While obtaining insurance quotes generally does not impact your score, any application requiring a credit check should be approached cautiously. Avoid initiating actions that involve hard credit inquiries close to the time you plan to apply for a mortgage.