How to Get Approved for a Bad Credit Mortgage

Having less-than-perfect credit doesn't have to hold you back from achieving the dream of homeownership. While getting approved for a mortgage with bad credit presents challenges, it is possible with the right approach. Read on to learn what bad credit mortgages are, requirements to qualify, how to improve your approval odds, and tips for securing financing despite low credit scores.

What is a Bad Credit Mortgage?

A bad credit mortgage is a home loan designed for borrowers with:

Low credit scores

Typically below 620 FICO.

Negative items

Such as foreclosures, bankruptcies, judgments, or late payments.

Insufficient credit history

Those termed as having “thin files”.

Types of Bad Credit Mortgage Loans

Common bad credit mortgage options include:

FHA loans

Offered by the Federal Housing Administration.

VA loans

Provided by the Department of Veterans Affairs.

USDA loans

For rural housing from the US Department of Agriculture.

Subprime loans

From private lenders specializing in bad credit.

Minimum Credit Score Requirements

Minimum FICO scores for approval include:

FHA loans

500-580 FICO in most cases.

VA loans

Typically 600+ but no set minimum.

USDA loans

No defined minimum FICO score.

Subprime loans

Around 600+, depending on the lender.

Down Payments, Interest, and Fees

With bad credit mortgages expect:

Higher interest rates

Typically 2-5% above good credit mortgages.

Larger down payments

At least 10-20% in most cases.

More fees

1-2% of the loan amount in origination fees.

Documentation for Your Application

Provide the mortgage lender with:

Tax returns

2 years minimum to show income history.

Pay stubs

30+ days of pay stubs to verify income.

Bank statements

To demonstrate cash reserves for your down payment.

Credit report

Printed copy of your current credit report.

How to Improve Your Chances of Approval

Beyond the minimum requirements, you can better your odds of approval by:

Increasing your down payment

Ideally 20% or more of the purchase price.

Adding a cosigner

Having a cosigner with good credit strengthens the application.

Lowering your debt

Pay down and consolidate higher interest debts.

Explaining past issues

If you've corrected past problems, point this out.

The Mortgage Approval Timeline

Here are typical steps and timeframes in the approval process:

Pre-approval

1-3 days to obtain a pre-approval letter.

Underwriting

4-6 weeks for loan underwriting and approval.

Closing

4-6 weeks to finalize after underwriting.

Total timeline

Around 45-60 days from application to closing.

Alternatives if Denied Approval

If denied a traditional mortgage, consider these options:

FHA streamline refinance

Refinance an existing FHA loan under new guidelines.

VA streamline refinance

Quick and easy refinance of a VA loan.

USDA streamline refinance

Refinance on an existing USDA loan.

Hard money loans

Asset-based lending from private investors.

FAQs

What is the absolute lowest credit score for approval?

Each lender has its own standards, but often around 500 FICO.

Can I qualify with only investment property income?

Yes, as long as you meet debt-to-income ratio requirements.

How long after a short sale or foreclosure can I get approved?

Most lenders want 2 years of reestablished positive credit.

Can I get a mortgage within a year of bankruptcy?

It’s unlikely - most want at least 12-24 months.

Conclusion

While having excellent credit makes getting a mortgage easier, bad credit does not automatically disqualify you either. Conventional mortgages, government-backed loans, and specialized subprime lenders provide options even if your credit score is not perfect. Focus on improving your credit, keeping debts low, saving for a down payment, and providing full documentation. With persistence and disciplined financial habits, homeownership can still be within your reach.