If you have bad credit, then the primary option for you to buy a home is an FHA loan. If your credit score falls between 500 and 579 and you can make at least 10% down payment, you likely qualify for an FHA loan.
If your credit score is 580 and 620, the golden score for qualifying for a conventional loan, you will likely qualify for an FHA loan and only need a 3.5% down payment. Additional advantages of an FHA loan for people with lower credit scores include:
- Shorter wait times after negative credit events, such as foreclosure, short sale, bankruptcy and divorce
- Lower interest rates than conventional loans
- Acceptance of a higher debt-to-income ratio than conventional loans
Disadvantages of an FHA loan compared to conventional loans include longer times to get approved and the requirement of mortgage insurance, usually a 1.75% upfront premium and 0.45%–1.05% annual premium too. But, given that you can buy a home with a lower credit score, those are minor if home ownership is your dream.
VA loans and USDA loans are also options for some borrowers.
- VA loans are available to active military members with credit scores of 620 or higher, require no down payment, offer competitive interest rates and can be easier to qualify for than conventional loans
- USDA loans are available in rural areas to those with certain income levels and credit scores of 620 or higher, require no down payment, offer competitive interest rates and can be easier to qualify for than conventional loans