Derek had $18,000 saved, five years at the same warehouse job, and a 574 credit score. His bank told him to come back in two years. He closed on a $196,000 house eleven weeks later through a different loan program. Nothing about his income changed in that time. What changed was the type of loan he applied for.
That gap between “denied” and “approved” is usually a product decision, not a character flaw. One program rejects a 580 score outright, another approves it but charges for the privilege, and a third barely glances at the number. Here’s how the options actually break down.
What “bad credit” means to a mortgage underwriter
Most lenders sort scores into rough buckets. Above 740 gets the best pricing. Between 680 and 739 is normal. From 620 to 679 you start paying loan-level price adjustments. Below 620, the conventional market mostly shuts down, and you’re shopping in the government-insured and portfolio space.
The score is only one input, though. Underwriters also weigh your debt-to-income ratio, how much cash you have left after closing, your rental history, and whether a past credit problem has a story attached to it. A 590 score with a paid-off car and four years of on-time rent often beats a 640 with three maxed-out cards. Ask any loan officer who has been doing this a decade and they’ll tell you the same thing: the score gets you in the door, the rest of the file gets you the keys.
FHA loans: the workhorse for low scores
FHA is where most bad-credit buyers end up, and for good reason. The hard floor is a 500 score. At 580 and above you can put down 3.5%. Between 500 and 579, the down payment requirement jumps to 10%.
The trade-off is mortgage insurance that never fully goes away. You pay 1.75% of the loan amount upfront (rolled into the balance on a $250,000 loan, that’s $4,375) plus an annual premium of about 0.55%, which works out to roughly $114 a month. On a loan with less than 10% down, that premium lasts the life of the loan unless you refinance out of it later.
FHA also allows gift funds for the entire down payment, permits DTI ratios up to about 50% with compensating factors, and counts nontraditional credit like utility and phone payment history. If you’re buying your first place, the first-time home buyer mortgage playbook walks through the sequence of credit pulls, pre-approval, and offer timing so you don’t waste a hard inquiry.
VA loans: no score minimum on paper
VA doesn’t set a credit score floor at all. The catch is that individual lenders add their own overlays, and most land somewhere between 580 and 620. VA loans come with 0% down, no monthly mortgage insurance, and a funding fee of 2.15% on a first use (waived for buyers with service-connected disabilities).
Underwriters lean hard on residual income, meaning what’s left over each month after the mortgage and other obligations. A veteran with a modest score but healthy leftover cash can sail through. One with a 700 score and a thin margin gets asked for explanations.
USDA loans: zero down, rural only
USDA-backed loans also require nothing down and typically want a 640 score, though some lenders go to 620. Household income must fall under 115% of the area median, and the property has to sit in an eligible rural zone, which surprises people more often than you’d think. Subdivisions on the edge of a mid-size metro frequently qualify.
Fees are lighter than FHA: a 1% upfront guarantee fee and 0.35% annually. Our guide to mortgage types for rural home buyers breaks down where USDA stops and FHA or a local portfolio lender picks up.
Conventional loans when your score is near the line
Fannie Mae and Freddie Mac technically accept scores down to 620. Below that, you’re out. At 620 to 639, the price adjustments are brutal: on a loan with 5% down, expect roughly three points added to the cost, which on a $250,000 mortgage is about $7,500 in fees or a rate that’s meaningfully higher.
One bright spot is the 3%-down conventional programs aimed at first-time buyers with income limits. If your score sits at 660 and you qualify, you dodge both the FHA insurance premium and the worst of the pricing hits.
Portfolio lenders and non-QM loans
Small banks and credit unions sometimes keep mortgages on their own books instead of selling them. Those portfolio loans don’t have to follow agency rules, so a loan officer who likes your file can argue your case to an underwriter sitting down the hall. This is the least glamorous, most underused route for buyers with damaged credit.
Then there’s the non-QM market, which prices risk instead of rejecting it:
- Bank statement loans for self-employed borrowers, using 12 to 24 months of deposits instead of tax returns.
- Fresh-start programs that allow a mortgage as soon as 12 months after a bankruptcy or short sale.
- Asset depletion loans that convert savings or investments into qualifying income.
- DSCR loans for investors, approved on the property’s rent rather than the borrower’s personal income.
Expect rates 1.5 to 3 percentage points above agency pricing and down payments of 10% to 20%. Still, a 7.9% loan that closes beats a 6.4% loan that never gets issued. For a side-by-side of how each structure prices out, see what each type of mortgage really costs.
Hard money and seller financing
Hard money lenders care about the property, not your FICO. They’ll lend 65% to 75% of a home’s value at 8% to 12% interest plus two to four points, usually for 12 to 24 months. That structure suits fix-and-flips and distressed purchases, not a family moving into a forever home.
Seller financing is the friendlier cousin. When the seller carries the note, the credit decision belongs to one person who mostly wants a big down payment and a clean story. A lease-option arrangement can work similarly: rent for a year, rebuild the score, then buy at a locked price.
The real cost of a bad-credit mortgage
Run the numbers before you fall for a house. On a $250,000 30-year loan, 7.0% costs $1,663 a month. At 8.5%, it’s $1,922. That’s $259 more every month, or $15,540 over five years, for the identical property.
Discount points can buy the rate down, but paying $6,000 upfront to save $120 a month takes 50 months to break even. If you plan to refinance in two or three years once your score recovers, paying points rarely makes sense. Our breakdown of what the mortgage loan menu actually costs covers the fee stack line by line.
Shaving points off your score before you apply
A few months of focused work can move a 590 to 640, and that shift alone can cut your rate by half a percent or more. The moves that pay off fastest:
- Pay revolving balances below 30% of the limit, ideally under 10%. Utilization is the single heaviest lever and it updates monthly.
- Dispute genuine reporting errors. Roughly one in five credit reports contains one, and a rapid rescore can clear it in days.
- Leave old accounts open, even unused ones. Closing a card cuts your available credit and can drop your score.
- Avoid new credit applications for six months, including store cards and car loans.
- Ask the lender about collection accounts rather than assuming you must pay them. FHA only requires resolution on disputed collections over $2,000, and paying an old collection sometimes doesn’t help your score at all.
- Know the waiting periods: FHA wants two years after a Chapter 7 discharge and three after a foreclosure, while conventional wants four and seven.
Shop the lender, not just the house
Two lenders can offer the same FHA program at the same rate and still produce wildly different outcomes, because overlays are where approvals die. One bank sets a 640 minimum for FHA even though the government allows 500. Another approves at 580 but charges a 1.5-point origination fee.
Get Loan Estimates from at least three sources: a big retail bank, a mortgage broker who can shop several wholesalers, and a local credit union. Compare the same rate across all three so you’re measuring fees rather than mixing rate and cost. Then ask one blunt question of each: “What is your minimum credit score for this program, and are there any overlays above the agency guideline?” The answers will tell you more about your odds than any rate quote ever will.