A 580 credit score. A $35,000 car loan in collections. Two credit cards sitting at 90% utilization. If that sounds like your credit picture, you might believe a mortgage is a fantasy. It’s not. But you’ll need a different playbook than someone with a 760 score. Let’s walk through how a bad credit mortgage actually works, what it costs, and the programs that will take a hard look at you.
What Counts as a Bad Credit Mortgage?
These are the raw numbers lenders use to label your application.
- Under 500: Very few options. A small number of non-QM lenders will consider you.
- 500 to 579: FHA will say yes, but only if you put down 10%. You will also pay the highest rates within that program.
- 580 to 619: FHA drops to a 3.5% down payment. Some conventional mortgages become possible.
- 620 and above: You’re no longer in ‘bad credit’ territory for most lenders. At this point, the challenge shifts to your debt-to-income ratio and employment history.
So when we talk about a bad credit mortgage here, we mean a loan designed for a FICO between 500 and 619. You can obtain one, but you’ll trade higher costs for the chance to build equity.
What It Costs to Borrow With Bad Credit
Let’s put real numbers on it. Imagine you’re borrowing $250,000 for a house. A borrower with a 740 score might get a 6.5% interest rate. The monthly payment for principal and interest is about $1,580. Now consider a 580 score. Lenders often quote 7.8% to 8.2% on an FHA loan in this scenario. At 7.8%, your payment is $1,800. That’s $220 more per month, and you’ll pay roughly $79,000 extra in interest over 30 years.
That’s the price of bad credit.
You’ll also face mortgage insurance. On FHA, the upfront premium is 1.75% of the loan, and annual premiums run for as long as you have the loan if you put down less than 10%. Some conventional lenders allow you to avoid this. If you can find a way to skip private mortgage insurance altogether, you can save thousands over the first five years.
But don’t let the numbers scare you off. A refinance in three to five years can wipe away a high rate if your score improves. Plenty of bad credit buyers plan for that.
5 Concrete Steps Before You Apply
Do not blindly apply to five lenders. That leads to multiple hard inquiries and unnecessary rejections. Instead, make these moves in the 60 days before you apply.
- Dispute errors on all three credit reports. A 2023 Consumer Financial Protection Bureau report found that about one in five consumers had a dispute-worthy error. Even one correction can raise a score by 20 or 30 points.
- Pay down your revolving balances. The amount you owe makes up 30% of your FICO score. Going from 60% utilization to 30% can shift you from 570 to 600.
- Do not close old credit cards. Closing a card lowers your available credit and shortens your average account age.
- Stop using new credit. One hard inquiry costs a few points, but six of them look desperate to lenders.
- Lower your debt-to-income ratio. That means paying off a small loan with a high monthly payment. A $200 car payment removed can move your DTI from 48% to 44%, and that is meaningful for approval.
Remember: a mortgage application is a snapshot of your financial life. That snapshot can be staged.
Mortgage Programs That Actually Accept Bad Credit
FHA Loans
The Federal Housing Administration backs loans with a credit score as low as 500. That doesn’t mean any lender will say yes, but the agency gives you a floor. With a score between 500 and 579, you need a 10% down payment. At 580 or higher, a 3.5% down payment qualifies.
The catch? Upfront mortgage insurance, annual mortgage insurance, and limits on how much you can borrow. But for many bad credit buyers, FHA is the only realistic gateway.
VA Loans
If you’re an active-duty service member, veteran, or surviving spouse, you can use the VA loan program. It typically requires zero down payment and no monthly mortgage insurance. The VA does not impose a minimum credit score. In reality, most mortgage lenders want a 580 to 620. But some portfolio lenders go lower, especially if your employment and income are strong. That could open up a zero down payment mortgage without fighting conventional underwriting.
USDA Loans
The Department of Agriculture uses a 640 minimum on many approved lenders. That’s higher than bad credit. But if your score is just below 640, some USDA lenders will manually underwrite with compensating factors like stable rent payments and low debt. The best part is 100% financing.
Non-QM Loans
Non-QM stands for non-qualified mortgage. These loans don’t meet the CFPB’s strict ‘ability to repay’ rules, so lenders can be more flexible. They are also more expensive. Rates run 1% to 3% above prime. Down payments often start at 15% or 20%. Some lenders will go as low as 500 FICO if your income is high and well documented. If you’re self-employed, a non-QM ‘bank statement loan’ might be your only option with bad credit. Weigh the costs carefully.
Down Payments: How Much You Really Need
Conventional wisdom once demanded 20% down. Let’s retire that idea for bad credit buyers.
If you have a 580 FICO, an FHA loan with 3.5% down is the default move. That means you need $8,750 for a $250,000 home. A conventional low down payment mortgage like HomeReady can also go to 3% down, but its minimum credit score is usually 620. So FHA may be your actual friend.
On the flip side, if you have 20% to put down, you can offset some of the risk a lender sees. That might nudge your rate down, and it eliminates PMI on conventional loans. But for most bad credit buyers, the math favors a smaller down payment and keeping cash in reserve. Lenders want to see at least one month of mortgage payments in the bank after closing.
Stretching the Loan Term to Breathe
Your monthly payment is the pain point. One way to lower it is to increase the loan term. A 40-year mortgage can trim up to 10% off your monthly payment compared with a 30-year loan. On that same $250,000 loan at 7.8%, a 40-year term drops your principal and interest payment to around $1,600, which is nearly the same as what the 740-score borrower pays on a 30-year loan.
The downside: you pay interest for another decade, and the equity grows more slowly. That’s the trade-off.
Once your income stabilizes or you refinance to a lower rate, you can switch to a biweekly payment mortgage plan. Payments every two weeks add up to one extra monthly payment a year, which shortens your amortization and saves thousands over time. But check that your lender applies the biweekly plan correctly. Some charge a fee for this, and the savings are modest if your rate is high.
When to Wait and When to Push Ahead
A 510 FICO might be 580 in six or seven months if you make the right moves. That six-point difference can be the difference between a 10% down payment and a 3.5% down payment. It can also reduce your interest rate by a quarter point. So if you’re borderline, patience is a strategy.
However, if waiting means losing the house you want to a rising market, or if your credit has a collection that will take 12 months to remove, it’s smart to buy now and refinance later. Home prices can outpace your rate savings. You have to guess which is more likely. The most honest answer is: do the math, and don’t overreach.
Your Pre-Approval Action Plan
Here’s how to proceed.
- Check your credit score and pull your reports from AnnualCreditReport.com.
- Pick a target loan program: FHA at 580, FHA at 10% down, VA, USDA, or non-QM.
- Gather two years of tax returns, pay stubs, and bank statements. If you’re self-employed, two years of bank statements or a profit and loss statement.
- Find a mortgage broker who works with low-credit buyers. They have access to more than one wholesale lender and can tell you which program is the best fit.
- Ask for a Loan Estimate. Compare the APR and total closing costs across two or three lenders, not just the beginner interest rate.
You’ll likely need to explain a few things: late payments, collections, or a recent job change. That’s fine. Underwriters care more about patterns than one-off mistakes. The key is to be honest, have your paperwork ready, and let your numbers speak.
Start with your credit report tonight. Then call a local broker. You might be closer to homeownership than you think.