Having a low credit score can make it tougher to refinance your mortgage. Lenders will tend to see you as more of a risk and act accordingly. That said, people seem to assume that average or bad credit is a deal-breaker, but this isn't true.
Let’s see which mortgage lenders are the best for people with bad credit.
Our Top Mortgage Lenders for Bad Credit
Minimum Credit Score
|Get an Offer|
FHA, VA, Conventional
|Not Specifed||View Rates|
FHA, VA, 203k loans
|Not published||View Rates|
Can I Get a Loan with Bad Credit?
The obvious question most people with bad credit have is “can I get a loan if my credit score is low?” The answer is yes; you simply need to know where to look. There are several reasons for having bad credit, including:
- Never building your credit in the first place
- Missing monthly payments or having outstanding debt or bills
- Filing for bankruptcy
The first reason gives you more leverage since it means you haven’t been delinquent, just that you never established your own credit. This could be because you are too young (students), are/were serving in the armed forces, or never took out a line of credit. In these cases, lenders are more willing to work with you as you pose less risk to them. The other 2 reasons are trickier, but you can still be approved for a loan, though the terms will generally vary from a typical loan. Lenders will also take into consideration just how low your score is before making an offer. That being said, the bad credit mortgage market has opened up over the past few years, making it more competitive and driving down the rates.
Mortgage Options for People with Bad Credit
People with bad credit often don't have the disposable income to provide a substantial down payment on their homes. For this reason, alternative home loans are offered to this clientele. For example, FHA loan providers can give you a down payment of as low as 3.5%. VA lenders offer fee waivers and lower interest rates and require no down payment. You have a lot of options in terms of the types of home loans available to you even with bad credit.
- Federal Housing Administration (FHA) Loan
If you’re a first time home-buyer you can apply for a Federal Housing Administration (FHA) loan even with a credit score as low as 580. The loans are insured by the FHA and allow first time homebuyers to get a mortgage with a down payments as low as 3.5% if you have a credit score of 580 or higher. Keep in mind though you will have to pay private mortgage insurance (because of the low credit score), which can be around 1.75% of the loan amount upfront plus .85 percent annually. FHA loans are popular for all type of borrowers, including people looking to get a loan for mobile and manufactured homes.
- Veterans Affairs Home Loan
If you are a current or former member of the armed forces, you can apply for a Veterans Affairs home loan. A VA loan allows you to finance 100% of the cost of the house with zero down payment. You also won’t need to pay monthly mortgage insurance, but most people who sign a VA loan are required to pay a funding fee of 2.15%. Typically you can get one even with less than ideal credit, though this may affect the terms of your loan.
- USDA Loan
If you live are looking for a single family house in a rural area you can get a loan with the United States Department of Agriculture (USDA). These are fixed rate, low interest loans that aren’t typically as stringent about your credit history, and do not require a down payment. You will need to be someone who lacks “decent, safe and sanitary housing,” in order to qualify, and you need to buy in a rural area with 35,000 residents or less.
Conventional Loan (Conventional 97)
A credit score of as low as 620 can be enough to qualify for a conventional loan that is financed up to 97%. These are loans that aren't funded by the government and usually have a higher interest rate.
- Home Equity Loan
If you already have a house with equity on it, then you can reply for a home equity loan, even with poor credit. Basically, you’re borrowing against the equity in your own home, which can be a good option if your credit is boxing you out elsewhere.
Not every lender allows it, but a co-signed loan can be a solid way to get a mortgage even if your credit is in bad shape. Basically, with a cosigned loan, you find someone with good credit - typically a close relative - who has good or better credit and is willing to sign off on the loan. The only drawback is that if you default, the co-signer is on the hook for the loan as well, and could suffer a hit to their credit rating.
- Rent to Own Lease
Repairing your credit can take time, and by doing so, you can improve your ability to get a loan. One way to buy yourself some time is with a rent to own lease, which allows you to pay rent and live in the home with the option to buy it later. In the meantime, you can repair your credit and get better terms when you’re ready to sign for a mortgage.
Home Loan after Bankruptcy
A bankruptcy is by no means the end of it all, and you can still own real estate again down the road someday. Called “second chance home loans,” these deals can help you get a mortgage after you’ve taken the time to repair your finances - usually at least a year or two.
Homeownership and Opportunity for People Everywhere (Hope I)
With a HOPE I loan through the Department of Housing and Urban Development, low-income people living in public housing units can become homeowners, even with bad credit or low income.
Fannie Mae HomeReady Program
If you have at least a 620 credit score you may qualify for a HomeReady loan through Fannie Mae. These loans can come with down payments as low as 3 percent, and can even be given to people with no credit history at all, as long as they have a history of making bill payments like rent and car notes.
How to Refinance with Bad Credit
If you’re thinking of refinancing your mortgage then you probably already know the potential benefits - lower interest rates and payments, a shorter payment term, using some of your equity, consolidating debt, and more.
But how do you refinance with bad credit?
If you’ve been making mortgage and credit payments regularly and your credit has improved you’ll be in better shape, but even if not, you have options.
Besides repairing your credit or using a co-signer, you can pursue a number of government programs that can help you refinance and stay in better financial shape.
The Home Affordable Refinance Program can help people with Freddie Mac or Fannie Mae mortgages get better terms on their monthly mortgage payment. You need to have had no late mortgage payments for 6 months and little or no equity and live in a home which has decreased in value in order to qualify.
People who have a Federal Housing Administration mortgage you can use the FHA program in order to refinance your mortgage, without having to do a credit check. This can really help you get better terms on your FHA mortgage, which tend to be low down payment with high monthly payments.
Home Equity Loan and HELOC
If your home has built up equity then you can use that equity to refinance your mortgage even if your credit is less than stellar.
What Rates to Expect
Of course, having bad credit does come with some drawbacks, and that usually comes in the form of higher interest rates or monthly payments. The plus side here is that FHA, VA, and other government-regulated loans are required to charge lower interest rates, helping people with bad credit afford their loans. For the average 30-year fixed rate loan, borrowers with bad credit can expect to pay approximately 5.481% APR. However, FHA loans can run as low as 3.5% if you have a score of 580 or higher. Lower than that, and you might pay as much as 10% APR.
Rates will vary significantly, though, depending on your individual circumstances, loan terms, and lender. It’s a good idea to compare various offers from several lenders before signing on a loan. You can also get a better rate by paying a larger down payment. This initial payment will lower your loan amount and rates.
Having a low credit score doesn’t mean that you can’t get a good loan--it just means you need to come to the right place. Look into the right government-backed programs, as well as into lenders with rates geared especially for getting a mortgage with bad credit. The best lenders for low credit will take into account your overall lifestyle when offering you rates so you can find a mortgage that works for you.