How to Buy a House With Bad Credit: Loan Options, Down Payment, and a Path Forward

Yes, you can buy a house with bad credit — federal loan programs were built for this situation, though eligibility depends on the lender and your specific factors. FHA loans accept FICO scores as low as 500 with 10% down, or 3.5% down at 580+ (HUD Handbook 4000.1). VA loans set no HUD-level minimum for eligible veterans (VA), and USDA loans typically require a 640 for streamlined underwriting (USDA). The harder question isn't whether you can — it's whether you should right now, or spend six months rebuilding your file first. This guide walks the programs that will approve you, the numbers each one requires, and an honest framework for deciding when to buy. For the underlying score-band conversation, see the credit score you need to buy a house.

Key Takeaways

• FHA loans allow FICO scores as low as 500 with 10% down, or 3.5% down at 580+ (HUD).
• VA loans have no HUD-set minimum; lender overlays typically fall between 580 and 620 (VA).
• USDA loans generally require 640 for streamlined underwriting (USDA).
• A larger down payment, lower DTI (ideally under 43%), and 3–6 months of reserves are the three compensating factors underwriters use to approve a low-score file (CFPB).
• Waiting six months to raise a 560 to a 620 can save tens of thousands over the life of the loan — a math decision, not a moral one.

What Counts as "Bad Credit" for a Mortgage

FICO groups scores into five bands, and underwriters draw the subprime line at 620 for most conventional loans (Experian). Government-backed programs use different thresholds — a 560 rejected on a conventional loan can still buy through FHA.

| FICO band | Range | Mortgage implication | | Poor | 300–579 | FHA only (with 10% down) | | Fair | 580–669 | FHA at 3.5% down; VA if eligible; USDA at 640+ | | Good | 670–739 | All programs; rates still below prime | | Very good | 740–799 | Best conventional pricing; lowest PMI | | Exceptional | 800–850 | Top-tier rates |

Source: FICO.

Two mechanics matter. Mortgage lenders pull all three bureaus and use the middle score, not the average — a 610-580-560 spread is a 580. And most lenders still use older FICO models (FICO 2, 4, and 5), not the FICO 8 you see on free-score apps (Experian), so your mortgage-pull number is often 20–40 points off from your monitoring app. For the broader picture of what lenders check beyond score, see what you need to buy a house.

Minimum Credit Scores by Loan Type

Four main paths accept sub-620 borrowers, each with its own threshold and cost structure.

| Loan program | Minimum FICO | Minimum down | DTI ceiling | Mortgage insurance / funding fee | Best for | | FHA | 500 (with 10% down); 580 (with 3.5% down) | 3.5% at 580+; 10% at 500–579 | 43% (up to 50% with compensating factors) | 1.75% upfront MIP + annual MIP (0.15–0.75%) | Sub-620 borrowers, first-time buyers | | VA | No HUD minimum (lender overlays typically 580–620) | 0% | 41% guideline (flexible) | 1.25–3.3% funding fee (waived for disabled veterans) | Eligible veterans, active-duty, surviving spouses | | USDA | 640 for streamlined; manual underwrite below | 0% | 41% front / 43% back | 1% upfront + 0.35% annual | Rural/some suburban buyers under income limits | | Conventional (Fannie/Freddie) | 620 (typical); 660+ for competitive rates | 3% (5% common) | 45% (up to 50% with strong file) | PMI required below 20% down (0.5–1.5%) | 680+ FICO with 5%+ down |

Sources: HUD Handbook 4000.1, VA, USDA, CFPB.

FHA Loans — 500 With 10% Down, 580 With 3.5% Down

FHA is the primary path for anyone below 620. HUD sets two tiers (HUD): 500–579 requires 10% down, 580+ qualifies for 3.5% down.

FHA carries mortgage insurance in two pieces: upfront MIP of 1.75% (financed into the balance) and annual MIP of 0.15–0.75% based on LTV and term (HUD MIP schedule). On a $250,000 loan, that's roughly $4,375 upfront plus $37–156 monthly. MIP lasts 11 years or the life of the loan depending on down payment.

Individual lenders add "overlays" — stricter rules than HUD's floor. Some won't go below 620 even though HUD allows 500, so shopping two or three lenders matters. If automated underwriting declines you, ask about a manual underwrite. For the full FHA picture, see types of mortgage loans.

VA Loans — No HUD Minimum, Lenders Set Their Own

The VA guarantees a portion of the loan, so lenders take less risk — the VA itself sets no minimum credit score (VA). Lender overlays typically land 580–620. VA loans offer three things no other program matches: zero down payment, no monthly mortgage insurance, and a funding fee (1.25–3.3%) that can be waived for veterans with a service-connected disability.

Who qualifies: eligible active-duty, veterans, National Guard and Reserve after six years, and surviving spouses. If you may be eligible, VA is almost always the best subprime path — see first-time home buyer mortgage.

USDA Loans — 640 for Streamlined, Rural Areas Only

USDA guaranteed loans require a 640 FICO for automated underwriting; below that, a manual underwrite is possible with compensating factors (USDA). The property must sit in a USDA-eligible area (much of America qualifies), and household income cannot exceed 115% of area median. USDA offers zero down and a lower annual MI (0.35%) than FHA — for eligible buyers, it can beat FHA on total cost.

Conventional Loans — 620+, but Rarely Cheaper Below 700

Fannie Mae and Freddie Mac generally allow 620 minimum, but pricing at that score is punitive — loan-level price adjustments (LLPAs) at 620–639 with 5% down can add 3+ points to loan cost. A low-score borrower is almost always better off with FHA below 700 FICO. For the mortgage-market overview, see how to buy a house.

How a Larger Down Payment Offsets a Low Score

Underwriters weigh your file as a package: score, LTV, DTI, and reserves. A low score doesn't sink the file if the other three are strong, because more money down reduces the lender's loss exposure if you default (CFPB).

FHA and conventional pricing sheets tier at 5%, 10%, 15%, and 20% down — dropping into a lower LTV band can improve your rate by 0.125–0.375 points at the same FICO. And at 500–579, HUD requires 10% down for FHA — coming up with the extra 6.5% is often the difference between approval and denial.

Where the money comes from when credit is stressed: gift funds from family (allowed with a signed letter), state or municipal DPA programs stackable with FHA, a 401(k) loan, or a 6–12 month delayed purchase. If you have no cash at all, review how to buy a house with no money down — VA and USDA are the zero-down paths.

Non-Score Levers: Co-Signer, Reserves, and DTI

Add a co-borrower or non-occupant co-signer. FHA permits non-occupant co-borrowers — a parent or sibling who signs but doesn't live in the property. Their income counts toward DTI and their higher score can move the file into approval range. They're fully liable (CFPB). Conventional loans price on the lower median score of all borrowers, so a 780 co-signer paired with a 560 primary is priced at 560 — another reason FHA usually wins for low-credit files.

Build cash reserves (3–6 months of PITI). Reserves are one of the strongest compensating factors on a manual FHA underwrite. Two months is a common floor; three to six materially strengthens the file. Retirement balances count at 60% of vested amount.

Lower your DTI before you apply. FHA's automated ceiling is 43%, up to 50% with compensating factors. The fastest lever isn't paying down cards — it's paying off small installment loans with fewer than 10 payments remaining, because those drop off the DTI calculation entirely.

Fastest Ways to Boost Your Score Before You Apply

Nothing moves a 540 to a 700 in a month. Realistic 30–90 day gains are 20–60 points on the right levers (Bankrate):

• Pay revolving balances below 30% utilization — ideally below 10%. Fastest-moving factor after payment history.
• Dispute reporting errors through each bureau's portal (CFPB). The FTC found one in five consumers had at least one error.
• Become an authorized user on a family member's old, low-balance, on-time card.
• Avoid new credit inquiries for 3 months before applying — each hard pull can dock 5–10 points.
• Don't close old cards. Closing shortens history and raises utilization.
• Ask for a goodwill deletion on a single late payment if the account is otherwise clean.

Pull all three reports free at AnnualCreditReport.com first.

Non-Mortgage Paths: Seller Financing and Rent-to-Own

When no lender will approve and the timeline can't wait, two structures exist. Both carry risks mortgage regulations don't cover (CFPB).

Seller financing. The seller acts as the lender; a promissory note and mortgage/deed of trust are recorded. Rates and terms are negotiable, but seller-financed deals typically carry higher rates (7–10%+), shorter amortization, or a balloon payment after 5–7 years requiring a later refinance. Consumer protections are thinner, and Dodd-Frank limits how frequently non-institutional sellers can offer financing. Involve a real estate attorney before signing.

Rent-to-own (lease-option, lease-purchase). You rent for 1–3 years under a contract that gives you the option — or obligation — to buy at a pre-set price. You pay an upfront option fee (1–5%, usually non-refundable) plus a rent premium credited toward the purchase. Most contracts favor the seller (CFPB): miss a rent payment and the option can be voided; fail to qualify at the end and fees are forfeited; if value drops below contract, you overpay.

When to Buy Now vs. Wait — an Honest Framework

Buying with bad credit costs meaningfully more than buying with good credit, and sometimes the wait math beats the buy-now math. Three questions:

1. Can your score realistically move 60+ points in 6 months? Fixable items (high utilization, disputable collections) — yes. Recent charge-offs still aging — no.
2. Will rates or prices rise faster than you can save the rate difference? A 620-FICO FHA rate can sit 0.5–1.0 point above a 700-FICO rate. On a $300,000 loan, 0.75% is roughly $135/month, or $48,000 over 30 years.
3. Is rent rising faster than the incremental cost of buying today? Compare projected all-in PITI (including MIP) to projected rent 12 months out.

| Buy now if... | Wait if... | | Your score is stuck (no near-term catalysts) | You have clear fixable items (utilization, disputable errors) | | Rent is rising faster than local home prices | Home prices are flat or declining in your market | | You have 3–6 months reserves and stable income | Income is uneven or you have <2 months reserves | | You'd house-hunt in a USDA-eligible area | You're targeting a metro dominated by conventional pricing | | You're VA-eligible (no PMI, no down) | Your DTI is above 45% before the mortgage |

For a broader affordability check, see what you need to buy a house.

Your Next 30 Days — an Action Plan

1. Pull all three credit reports free at AnnualCreditReport.com.
2. Dispute any errors through each bureau's portal.
3. Calculate DTI: monthly debt payments divided by gross monthly income.
4. Pay any card balance above 30% utilization down below 10% at least 30 days before applying.
5. Get pre-approved with two FHA-approved lenders. Ask about overlays — answers vary widely.
6. If VA-eligible, request a Certificate of Eligibility through the VA portal.
7. Save your down payment: 3.5% at 580+, 10% at 500–579, plus 2–3% for closing.
8. Don't open new cards, finance a car, or co-sign in the 60 days before applying.