Most people assume a credit score in the low 600s shuts the door on homeownership. It doesn’t. Around one in five American consumers has a FICO score below 620, and lenders have been writing mortgages for that group for decades. What changes is which loan you qualify for and what it costs you.
Here’s the practical rundown of home buying options that work with bad credit, what each one demands, and where the real costs hide.
What Lenders Actually Look At
A mortgage underwriter doesn’t see just a three-digit number. They see payment history, balances, collections, income, savings, and how much of the purchase price you’re bringing. A 600 score with 15% down and two years of clean rent payments is a very different file than a 600 score with a car repossession from eight months ago.
That’s why two borrowers with identical scores can get offers that differ by $300 a month. Some lenders specialize in bruised credit. Others auto-decline anything under 660. Shopping around is not a nice-to-have here, it’s most of the work.
The score thresholds that matter
- FHA loans: 580 gets you in with 3.5% down. Between 500 and 579, expect to need 10% down.
- VA loans: The VA sets no minimum score, but most lenders want 580 to 620.
- USDA loans: Commonly 640, though some lenders will go to 600.
- Conventional loans: 620 is the floor, and pricing gets painful below 680.
- Non-QM and portfolio loans: 600 and up, usually with 10% to 20% down.
If you land right at that 580 line, there’s a detailed walkthrough of how to buy a home with a 580 credit score that covers underwriting quirks most loan officers won’t mention until you ask.
FHA Loans: The Workhorse Option
FHA is where most bad-credit buyers end up, and for good reason. A 3.5% down payment on a $300,000 house is $10,500. Debt-to-income ratios can stretch past 43% with compensating factors like reserves or a long employment history, and sellers can contribute up to 6% toward your closing costs.
The tradeoff is mortgage insurance, and it isn’t small. You pay 1.75% of the loan amount upfront, which works out to $5,250 on a $300,000 loan, usually rolled into the balance. Then there’s annual MIP of 0.55%, about $137 a month. Put less than 10% down and that monthly charge stays for the life of the loan. You don’t escape it until you have enough equity to refinance into a conventional mortgage.
Compare the alternatives before you commit. The best low down payment mortgage programs are laid out side by side there, including which ones let you drop mortgage insurance later on.
VA Loans: The Best Deal If You’ve Served
Nothing else comes close for eligible veterans, active-duty service members, and surviving spouses. Zero down, no monthly mortgage insurance, and the VA caps what lenders can charge in closing costs. Rates typically run a quarter to half a point below comparable conventional loans.
The cost is the funding fee: 2.15% of the loan amount on a first use with nothing down. On a $300,000 loan that’s $6,450, and it’s waived entirely for borrowers with a service-connected disability.
VA underwriting is also more forgiving than the score cutoff suggests. Residual income, the money left each month after debts are paid, often matters more than the number itself. A 590 score with healthy residual income and stable work history can clear at one lender and get rejected at the next, because plenty of banks stack their own minimums on top of the VA’s rules.
USDA Loans: Zero Down Outside the Cities
The USDA Guaranteed program offers 100% financing with a 1% upfront guarantee fee and a 0.35% annual fee, which is far cheaper than FHA mortgage insurance. Income limits apply, generally capped at 115% of the area median income, and the property has to sit in an eligible rural area. That covers a large share of the country by land mass, though much less by population.
Credit requirements are stricter than FHA. Most USDA lenders want a 640, and a thin credit file can hurt you as much as a low score.
Conventional Loans With a Little Help
You can get a conventional loan at 620, but you pay for it through loan-level price adjustments. A 620 to 639 score at 95% loan-to-value adds roughly 1.75% of the loan amount in fees. On a $285,000 loan that’s about $5,000, either paid upfront or baked into a higher rate.
A few ways to soften that hit:
- HomeReady or Home Possible: 3% down and reduced pricing for buyers earning under the area median income.
- Non-occupant co-borrower: A parent or relative on the loan can improve the qualifying picture, though not every program allows it.
- Credit union portfolio loans: Held in-house rather than sold to Fannie or Freddie, so the credit union writes its own rules.
- Non-QM loans: Bank statement and asset-depletion products that lean on income and reserves instead of credit score.
These vary enormously between lenders, which is why it’s worth reading a plain comparison of the best mortgage options for home buyers before you start making calls.
Seller Financing and Rent-to-Own
When banks say no, some sellers say yes. A land contract or contract for deed means the seller acts as the lender. No credit score, no underwriting, sometimes no down payment beyond a few thousand dollars.
Read the fine print carefully. Rates on seller-financed deals often run 7% to 10%, and many carry balloon payments due in three to five years. You don’t hold title until the contract is satisfied, which means if the seller runs into trouble, so do you.
Lease options work similarly. You pay an option fee of 1% to 5% of the purchase price for the right to buy later, and part of your rent may credit toward the down payment. The problem is that a large share of these arrangements never convert to a purchase, usually because the buyer’s credit hasn’t improved enough by the deadline. Have a real estate attorney review anything before you sign, and check for due-on-sale clauses if you’re considering assuming an existing mortgage.
Raising Your Score Before You Apply
A few months of focused work can move a score 40 to 80 points, which is often the difference between a 6.5% rate and a 7.5% rate on the same house.
- Pay revolving balances below 10% of your limits, not just 30%. Utilization is the fastest-moving factor in most scores.
- Leave old accounts open. Closing a card you’ve held for a decade shortens your history and raises utilization.
- Pull all three reports and dispute errors. Federal Trade Commission research found roughly a quarter of consumers had at least one potentially material error.
- Ask about a rapid rescore, which can update your file in days once a balance is paid down or an error corrected.
- Become an authorized user on a family member’s seasoned, low-balance card.
There’s plenty of bad advice floating around about credit and mortgages, and home buying myths that need to die is worth reading so you don’t burn months on tactics that never move the needle.
Cash You’ll Need Regardless of the Loan
Even a zero-down loan isn’t free. Budget 2% to 6% of the purchase price for closing costs, appraisal, inspection, and title work. On a $300,000 home that’s $6,000 to $18,000, some of which a seller may cover in a slow market.
Keep a cushion after closing. A furnace, a water heater, or a roof doesn’t wait for your budget to recover, and many lenders want to see one to two months of reserves in the bank. Figuring out how much to save before buying a home ahead of time keeps you from becoming house-poor in month two.
Matching Your Situation to the Right Loan
Specifics beat generalities, so here’s how the pieces usually fit together.
- Score 580 to 619, under $15,000 saved, first home: FHA. Accept the mortgage insurance and plan to refinance once your score clears 700.
- Veteran or active duty with a 580+ score: VA, every time. No other program competes on total cost.
- Score 620 to 679 with 3% to 5% saved: HomeReady or Home Possible, especially if your income sits under the area median.
- Score 500 to 579: Spend six months paying down cards before applying. A lease option is a fallback, not a first choice.
- Self-employed with write-offs that shrink your taxable income: A portfolio loan from a credit union or a non-QM product will read your real income better than agency guidelines allow.
The biggest lever most buyers ignore is comparison shopping. Get quotes from at least three lenders and one independent broker. On the same $300,000 loan, the spread between the worst and best offer for a 620 score can run past $200 a month. Over thirty years, that’s more than $72,000 left on the table for the sake of three phone calls.