Marcus had a 572 credit score, two collections from a hospital bill he assumed insurance had handled, and a steady $68,000 job he’d held for six years. Every online calculator he tried told him to keep renting. Nine weeks later he closed on a $238,000 house with 3.5% down.
That isn’t a loophole. The mortgage market has several programs built for borrowers whose credit took a hit, plus a smaller group of lenders who specialise in files the big banks won’t touch. What separates the people who get approved from the ones who don’t usually isn’t the score itself. It’s knowing which program fits your file and what the underwriter needs to see beyond the number.
What “Bad Credit” Really Means to a Mortgage Lender
An underwriter is answering one question: how likely is this person to stop paying? A 640 score with twelve months of on-time rent and $25,000 in savings reads very differently from a 640 with two maxed-out cards and a car loan in collections. Same number, different file.
The things that get weighed:
- Score band — 500, 580, 620 and 640 are the real dividing lines, not 700 or 740
- What caused the damage — a medical collection is viewed more kindly than a stack of unpaid store cards
- Waiting periods — bankruptcy, foreclosure and short sale each carry a clock that has to run out
- Debt-to-income ratio — all monthly debt payments divided by gross monthly income
- Reserves and down payment — cash left over after closing signals you can absorb a surprise
The score cutoffs that actually matter
Each program sets a floor, and individual lenders often stack a stricter overlay on top of it.
- FHA: 580 for 3.5% down; 500–579 with 10% down
- Conventional: 620 minimum, though pricing gets expensive below 680
- VA: no official minimum, but most lenders want 580–620
- USDA: 640 for automated approval, 581–639 through manual underwriting
- Non-QM: often 600, sometimes approval with no usable score at all
FHA Loans: The Workhorse for Bruised Credit
FHA is where most people with a score in the 500s end up, and for good reason. At 580 or above you can put down 3.5%. Between 500 and 579, the down payment requirement jumps to 10%, which is still far less than the 20% people assume they need.
The trade-off is mortgage insurance. You’ll pay an upfront premium of 1.75% of the loan amount, which can be rolled into the loan, plus roughly 0.55% a year in annual premiums. On a $240,000 loan that’s about $1,100 a year on top of principal and interest. If you put down 10% or more, the annual premium drops and eventually falls off after eleven years. Below 10% down, it typically stays for the life of the loan — which is exactly why refinancing later matters.
FHA also caps how much you can borrow. In low-cost parts of the country the ceiling sits around $524,000 for a single-family home, higher in expensive metros. Debt-to-income generally maxes out at 43%, though an automated approval or a strong set of compensating factors can push it toward 50%.
VA and USDA: Two Underused Programs With Real Advantages
VA loans
If you or your spouse served, this is the best loan in the country and almost nobody with shaky credit checks it first. Zero down payment. No monthly mortgage insurance. The VA itself sets no minimum credit score — the 580 or 620 you’ll hear quoted comes from individual lenders’ overlays, and some lenders are far more forgiving than others.
The funding fee runs 2.15% for a first use with nothing down, and it’s waived entirely for borrowers with a service-connected disability rating. The catch is a residual income calculation: after your mortgage, taxes, insurance and other debts, you need a certain amount left over each month based on family size and region. Bankruptcy has a two-year waiting period, foreclosure two years.
USDA loans
USDA-backed loans offer zero down for properties in eligible rural and small-town areas, with income limits around 115% of the area median. A 640 score sails through the automated system. Fall between 581 and 639 and you’ll go through manual underwriting, which means a human reads your file and weighs your rent history, job tenure and savings. It’s slower, and it’s often the difference between approval and a decline. Guarantee fees are 1% upfront and 0.35% annually, roughly a third of what FHA charges.
Conventional Loans at a 620 Score
Fannie Mae’s HomeReady and Freddie Mac’s Home Possible programs allow 3% down with a 620 score. HomeReady has an income cap — generally 80% of your area’s median — which rules out higher earners, but the pricing is often better than FHA once you account for mortgage insurance that cancels automatically at 20% equity.
Be ready for loan-level price adjustments. Below a 680 score, lenders add roughly 0.5% to 1.5% to your rate in cost. A 620 score might mean a 7.4% rate where a 760 score gets 6.6%. That gap is worth thousands over the life of the loan, which is the strongest argument for spending a year fixing your credit before you buy.
Waiting periods matter here too. Conventional guidelines want four years after a Chapter 7 discharge, two years after a Chapter 13 discharge and seven years after a foreclosure. FHA is more forgiving: two years after Chapter 7, one year into a Chapter 13 payment plan with court approval, and three years after foreclosure.
Non-QM and Subprime Lenders: Real, but Priced for It
Beyond the government-backed world sits a set of lenders who don’t sell loans to Fannie or Freddie, which means they aren’t bound by their credit rules. Bank statement loans, for instance, let self-employed borrowers qualify on 12 to 24 months of deposits instead of tax returns, often at a 600 score or with no score at all. Expect 10% to 20% down and a rate 1.5 to 3 percentage points above conventional.
Hard money occupies the far end of that spectrum: 10% to 13% rates, two to four points at closing, and loan-to-value caps around 70%. These are short-term tools, usually for investors flipping or stabilising a property, and they come with their own set of rules and exit strategies worth understanding before you sign. For anyone buying a rental or a fixer-upper, the calculus is different from a primary residence, and the loan types that make sense for real estate investors follow a different logic entirely.
What Actually Moves the Needle on Your Application
If your score is borderline, these are the levers with the most pull.
- Pay revolving balances down. Getting a maxed card from 90% utilisation to under 30% can add 30 to 50 points within one or two statement cycles.
- Dispute genuine errors. Furnishers have 30 days to investigate under the Fair Credit Reporting Act. Collections that shouldn’t be there are more common than people think.
- Document your rent. Fannie Mae now accepts 12 months of on-time rent payments pulled from bank statements as a compensating factor. So does manual underwriting.
- Add a co-signer or non-occupant co-borrower. A parent on the loan can carry you over a score or income threshold. FHA permits it on most purchases.
- Put more down. Going from 3.5% to 10% or 15% reduces the lender’s risk and can offset a weaker score in the approval decision.
- Show reserves. Two to six months of payments in the bank reads as stability, not luck.
Shopping Without Getting Taken
Bad-credit borrowers get targeted by predatory lenders, so this part deserves real attention. Three red flags: upfront fees charged before you’ve even applied, verbal “guaranteed approval” promises, and total loan costs above 5% of the loan amount in fees. Anyone who tells you your score doesn’t matter and won’t put anything in writing is selling you something.
Get quotes from at least three or four lenders and compare the APR, not the headline rate. Most scoring models give you a 45-day window to rate shop without extra inquiries stacking up, so bunch your applications together. Knowing how to pick a mortgage company that actually saves you money is worth more than any one rate quote.
Where you apply matters as much as the program. A big retail bank may have overlays that shut out a 600 score, while a credit union or a mortgage broker who works with alternative lenders may have three investors who’ll take it. Understanding where your home loan actually comes from — and who ultimately decides — makes the whole process less mysterious. Brokers in particular can submit the same file to multiple wholesale lenders without you filling out the paperwork four times, which is why finding lenders suited to your situation rather than someone else’s changes the outcome more than shopping for the lowest advertised rate.
The Refinance You’ll Want in Two or Three Years
Almost nobody with a 570 score should plan to hold that loan forever. FHA loans taken with less than 10% down carry mortgage insurance for the life of the loan, and the only way to remove it is to refinance into a conventional loan once you have 20% equity and a score around 700.
Do the math before the ink dries on your first closing. If you buy at 7.2% with FHA and your score climbs to 720 within two years, a conventional refinance at 6.1% on a $230,000 balance saves roughly $160 a month plus the $1,050 a year in annual premiums you stop paying. That’s close to $3,000 a year, and it’s the real reason taking a slightly worse loan today for a house you can afford is often smarter than waiting three years for perfect credit.
When that day comes, treat the refinance like a fresh shopping exercise. Telling a genuine refinance offer apart from a sales pitch comes down to comparing APR, lender credits and how long it takes to break even on closing costs — and refusing to be rushed by anyone claiming the rates are about to jump. Set a calendar reminder six months before you hit the two-year mark, pull your credit reports for free, and start with the same two or three lenders who treated you fairly the first time.