Few numbers weigh as heavily on a mortgage application as your credit score. If it falls below 620, you’re usually quoted higher interest rates than someone with good credit. But that doesn’t mean homeownership is out of reach. Lenders have built entire product lines for borrowers with imperfect credit. The challenge is understanding how mortgage rates for bad credit are set, and how to reduce them.
What “Bad Credit” Actually Means for Mortgage Rates
Most mainstream mortgage lenders treat 620 as the dividing line. Above it, you can typically qualify for a conventional loan with Fannie Mae or Freddie Mac. Below it, you’re in subprime territory, and the terms change quickly.
Credit scores are priced in tiers. For a conventional loan with a 5% down payment, a borrower at 760 might get the base rate of, say, 6.5%. Drop to 700, and the adjusted rate jumps by about 0.25%. At 660, it’s 0.75% to 1% higher. At the 620 threshold, the increase can exceed 2%.
Those adjustments come from loan-level price adjustments (LLPAs), which Fannie Mae and Freddie Mac publish. Lenders bake them into the quoted rate, which is why two borrowers with the same property and loan size can get very different numbers.
How Much More Will You Pay? Mortgage Rates for Bad Credit vs. Good Credit
The dollar gap is easier to grasp with a concrete example. Take a $300,000 mortgage with a 30-year fixed rate. A borrower with a 740 score might qualify for a 6.75% rate. A borrower at 620 might be offered 7.75%. That difference works out to roughly $210 per month. Over 30 years, that’s about $75,000 in additional interest.
That spread explains why many people with poor credit start with FHA loans. The Federal Housing Administration backs those loans, which means lenders take on less risk and can offer more favourable rates.
A closer look at mortgage rates by credit score shows the same pattern across every tier: each 20-point drop adds a tenth of a percent or more. For a bad-credit borrower, that puts a premium on every point you can raise your score.
The Main Factors Lenders Weigh Beyond Your Credit Score
Your credit score is the headline, but lenders read the fine print too.
Your debt-to-income (DTI) ratio shows how much of your monthly income goes to debt payments. Most conventional loans cap it at 43%, and a lower DTI can offset a weaker credit score. If your credit is poor but your DTI is 30%, lenders will view you as less risky.
Your down payment is equally important. A larger down payment signals commitment and reduces the lender’s exposure, so a 10% or 20% down payment can soften the rate impacted by bad credit. A 20% down payment also eliminates private mortgage insurance (PMI), saving you a few hundred dollars a month.
Employment stability matters too. If you’ve held the same job for two years and have steady, documented income, an underwriter will weigh that positively against your credit history.
Types of Mortgages Available to Borrowers with Bad Credit
Here are the main loan options to know:
- FHA loans – accept credit scores as low as 500 with a 10% down payment, or 580 with a 3.5% down payment. Rates are generally lower than subprime conventional loans, but you’ll pay mortgage insurance premiums for the life of the loan.
- VA loans – for eligible military members and veterans. No official minimum credit score, though most lenders want a 580 to 620. Government backing makes these some of the most affordable loans available.
- USDA loans – for homes in rural and suburban areas. Allow scores around 580 with a 1.5% down payment and offer competitive rates.
- Non-QM loans – designed for self-employed buyers, investors, or those with scores in the 500s. Rates run 2% to 3% higher than market averages, and down payments are often steeper.
- Hard money loans – short-term, investor-backed financing based on property value, not credit. Extremely expensive, best reserved for flips or bridge financing.
Which Loan Type Delivers the Best Rate?
For most bad-credit borrowers, an FHA loan is the practical sweet spot. It allows lower scores, requires a modest down payment, and keeps rates closer to market level. If you have military service, the VA loan typically beats everything else. The key is to compare quotes across loan types, not just lenders.
Practical Ways to Get a Lower Rate with Bad Credit
Your first quote isn’t your best quote. There are real strategies to reduce the interest you’ll pay.
First, raise your down payment. On an FHA loan, going from 3.5% to 10% down can lower your rate by half a point or more. On a $250,000 loan, that saves about $50 a month immediately.
Second, consider paying discount points. One point costs 1% of the loan amount and reduces your rate by about 0.25%. If you plan to stay put for at least five years, buying points can be worth it.
Third, increase your credit score before applying. Pay down credit card balances to lower your utilisation rate. If your utilisation drops from 50% to 30%, your score can jump 30 to 50 points, pushing you into a cheaper pricing tier.
Fourth, add a co-borrower with good credit. A spouse or family member with a 720 score can dramatically improve your terms. Just remember they’re legally responsible for the loan.
Finally, shop around. Mortgage rates for bad credit can vary by over a full percentage point from one lender to the next. Collect four or five quotes and compare the loan estimates side by side, including origination fees and closing costs.
And before you decide on a fixed-rate or adjustable-rate loan, check how rates are moving overall. Current mortgage rates today can shift on a Fed announcement or jobs report, so locking in the right day matters.
What Today’s Market Means for Bad-Credit Borrowers
In the current environment, the premium for poor credit is wider than it was in the low-rate era. When the 30-year average sits at 7%, a 620-score borrower might see quotes in the 8% to 9% range. FHA loans are more forgiving, but they come with overhead in the form of mortgage insurance.
Waiting for the market to turn isn’t an automatic win either. As rates ease, home prices often climb, and bidding wars return. The 2026 mortgage rates forecast suggests rates will settle somewhere between 6.5% and 7%, but it also predicts modest price appreciation. Locking in a 7.5% FHA loan today might be smarter than waiting a year and competing against more buyers.
That’s a deeply personal call. Run the numbers for your own situation, and look at the full cost over five to seven years, not just the first year’s payment.
Next Steps: Improving Your Chances over the Next 12 Months
If your score is currently below 580, the most valuable thing you can do is wait and repair. Start by pulling your credit reports from all three bureaus at annualcreditreport.com. Check for errors, duplicate accounts, or late payments that aren’t yours. A single mistake can drag a score down by 50 points.
Next, tackle your credit utilisation. Keep your credit card balances low relative to your limits. Paying a $1,500 balance down to zero can raise your score by 20 or 30 points, which might be the difference between an expensive non-QM loan and a cheaper FHA loan.
Finally, let your score season. If you’ve just paid off a debt or cleared a collection, give your credit file 60 to 90 days to reflect the change before you apply. Scores update on their own schedule, and lenders pull the latest number.
A year of patient credit work can save you thousands. That is not a delay; it’s the most reliable way to lower your mortgage rate without relying on luck.