1. Understand What “Bad Credit” Means
In the mortgage industry, a “bad credit” score is generally anything below 620 on the FICO scale. Lenders view this range as higher risk, which translates into higher interest rates and stricter loan‑to‑value (LTV) limits.
- Typical FICO range: 300 – 579 (very poor), 580 – 619 (sub‑prime).
- Average APR for sub‑prime 30‑year fixed: 7.2 % (vs. 5.5 % for prime borrowers).
- Maximum LTV most lenders allow: 80 % for conventional loans, 85 % for FHA, 90 % for some VA loans.
2. Clean Up the Basics Before You Apply
Even a modest credit‑score bump can shave 0.25 %–0.5 % off your APR. Follow these three quick actions:
- Pay down revolving debt. Reduce credit‑card balances to under 30 % of each limit. Example: $5,000 balance on a $15,000 limit drops the utilization from 33 % to 20 % and can raise a 620 score to ~640.
- Correct errors. Pull a free credit report from annualcreditreport.com and dispute any inaccuracies. Each successful dispute can add 5‑10 points.
- Establish a short‑term payment history. Keep a secured credit card or a credit‑builder loan active for at least three months and make every payment on time.
3. Choose the Right Loan Program
Not all mortgages are created equal. Below is a quick comparison of the most common options for borrowers with scores below 620.
| Program | Min. Credit Score | Down Payment | Max LTV | Typical APR* |
|---|---|---|---|---|
| FHA | 580 (with 10 % down) or 500 (with 3.5 % down) | 3.5 % – 10 % | 96.5 % | 6.8 % |
| VA | No minimum (must have service‑eligible status) | 0 % (with entitlement) | 100 % | 6.5 % |
| Conventional (non‑prime) | 620 | 5 % – 10 % | 80 % | 7.2 % |
| USDA Rural | 640 (some lenders 620) | 0 % (if eligible) | 100 % | 6.9 % |
*Rates shown are averages for September 2026 on a $250,000 loan with a 30‑year fixed term.
4. Build a Realistic Budget
Bad‑credit borrowers often need a larger cash cushion because lenders may require additional reserves. Use the calculator below to see how different down‑payment amounts affect monthly payment and total interest.
Assumptions
- Home price: $250,000
- Interest rate: 6.8 % (FHA, 620 score)
- Loan term: 30 years
- Property tax: 1.2 % of purchase price
- Homeowners insurance: $1,200 / yr
- PMI (if < 20 % down): 0.55 % of loan amount / yr
Payment Scenarios
| Down Payment | Monthly P&I | Monthly Tax/Ins | PMI | Total Monthly |
|---|---|---|---|---|
| $5,000 (2 %) | $1,645 | $250 | $114 | $2,009 |
| $12,500 (5 %) | $1,583 | $250 | $71 | $1,904 |
| $25,000 (10 %) | $1,500 | $250 | $0 | $1,750 |
Notice how a $25,000 down payment eliminates PMI and reduces the total monthly cost by $259 compared with a $5,000 down payment. Align your savings plan with the payment scenario that fits your cash flow.
5. Secure a Mortgage Pre‑Approval
A pre‑approval letter shows sellers you’re serious and locks in an interest rate for up to 120 days. When you have bad credit, ask the lender for a “conditional” pre‑approval that outlines exactly what documentation they need (pay stubs, tax returns, bank statements).
- Provide a full 12‑month bank statement trail to prove reserves.
- Include a letter of explanation for any recent late payments.
- Consider a co‑borrower with better credit to improve the rate.
6. Negotiate Closing Costs & Seek Down‑Payment Assistance
Closing costs typically run 2‑5 % of the purchase price. With a $250,000 home, that’s $5,000‑$12,500. Strategies to reduce out‑of‑pocket expenses:
- Seller concessions. Ask the seller to cover up to 3 % of the purchase price in closing costs; many sellers accept this in a competitive market.
- State or local assistance.Programs in many states (e.g., CA’s CalHFA) offer up to $15,000 in grant‑type help for first‑time buyers with credit < 620.
- Roll some costs into the loan. For FHA, you can finance up to 6 % of the loan amount in closing costs, though it raises the monthly payment.
7. Final Steps & Closing
Once your offer is accepted, the lender will order an appraisal, verify employment, and confirm insurance. With a bad‑credit profile, the appraisal may be more scrutinized; ensure the property meets minimum condition standards for FHA or VA loans.
On closing day, bring:
- Two forms of ID (driver’s license, passport).
- Proof of homeowners insurance.
- Certified funds for down payment & closing costs.
- All signed loan documents.
Ready to crunch the numbers?
Our free mortgage calculator lets you model different down‑payment amounts, credit‑score scenarios, and loan programs in real time.
Go to the Mortgage CalculatorFrequently Asked Questions
- Can I get a conventional loan with a 580 credit score?
- Conventional lenders generally require a minimum of 620. Some “non‑prime” programs may stretch to 580, but they come with higher rates and larger down‑payment requirements (often 10 %+).
- Do FHA loans really help borrowers with bad credit?
- Yes. FHA allows scores as low as 500 with a 10 % down payment, and 580 with only 3.5 % down. The trade‑off is mandatory mortgage insurance premiums (MIP) for the life of the loan unless you refinance later.
- Will a co‑borrower improve my loan terms?
- Adding a co‑borrower with a higher credit score can lower the APR by 0.25 %‑0.5 % and increase the allowable LTV. Both parties become equally liable for the mortgage.
- How much cash should I keep in reserves?
- Most lenders want 2‑4 months of mortgage payments in liquid reserves. For a $1,750 monthly payment, aim for $3,500‑$7,000 in a savings account after closing.