Quick Answer
With bad credit, focus on (1) fixing report errors, (2) paying down revolving balances, (3) proving income stability, (4) increasing down payment/savings, (5) considering insured or alternative programs, and (6) adding a strong co-borrower. Aim for DTI/GDS-TDS that fits guidelines and build 3–6 months of reserves.
What "bad credit" means (score bands; recent delinquencies)
| Credit Range | FICO Score | Options | Typical Requirements |
|---|---|---|---|
| Fair | 580-669 | FHA, VA, some conventional | 3.5-10% down, stable income |
| Poor | 500-579 | FHA (10% down), portfolio lenders | 10%+ down, compensating factors |
| Very Poor | <500 | Portfolio/alternative lenders | 20%+ down, co-signer often needed |
Recent negatives hurt most:
- 30+ day late payments in last 12 months
- Collections, charge-offs in last 24 months
- Foreclosure, bankruptcy in last 2-7 years
- High credit utilization (>30%)
Clean-up sprint: dispute errors, lower utilization, add positive history
60-Day Credit Sprint
- Week 1-2: Pull all 3 credit reports, dispute any errors
- Week 3-4: Pay down credit cards to <10% utilization
- Week 5-6: Add authorized user accounts, ask for goodwill deletions
- Week 7-8: Apply for secured card if needed, monitor score changes
Income stability and down-payment strategies
Strengthen your income profile:
- Stay in same job for at least 2 years before applying
- Document all income sources (overtime, bonuses, side work)
- If self-employed: 2+ years of tax returns, business bank statements
- Avoid job changes during mortgage process
Down payment strategies:
- Higher down payment = lower lender risk = easier approval
- Consider gifts from family (follow gift letter requirements)
- Use first-time buyer programs (down payment assistance)
- Save 3-6 months of reserves beyond down payment
Programs & paths: insured/alt-A, co-signers, rent-to-own cautions
Government-Backed Programs
- FHA: 580+ score, 3.5% down
- VA: No min score, no down payment
- USDA: 640+ typically, rural areas
- Canada: Insured mortgages <20% down
Alternative Options
- Portfolio lenders: Keep loans in-house
- Credit unions: Member-focused lending
- Non-QM lenders: Alt-doc programs
- Seller financing: Owner carries note
Rent-to-Own Cautions
- Often targets people with poor credit at inflated prices
- Most rent-to-own agreements favor the seller heavily
- High fees, little equity building, easy to lose deposit
- Better alternative: Work on credit for 6-12 months instead
Underwriting with compensating factors (reserves, LTV)
Compensating factors lenders consider:
- Large down payment: 20%+ shows financial commitment
- Cash reserves: 3-6 months of mortgage payments saved
- Low debt-to-income: <30% total monthly obligations
- Stable employment: Same job/field for 2+ years
- Co-borrower: Strong credit score and income
- Rent history: 12+ months of on-time rent payments
90-day action plan with milestones
Days 1-30: Foundation
- Pull credit reports and dispute errors
- Pay down credit cards to <10% utilization
- Start saving for down payment aggressively
- Research lenders and programs
Days 31-60: Building
- Monitor credit score improvements
- Continue income documentation gathering
- Build 3-6 months reserves
- Consider secured credit card for history
Days 61-90: Application Ready
- Apply for pre-approval with 2-3 lenders
- Compare loan offers and terms
- Start house hunting within approved range
- Have co-signer ready if needed
Frequently Asked Questions
What's the minimum credit score to qualify?
FHA allows 500+ with 10% down, 580+ with 3.5% down. Some portfolio lenders go lower with strong compensating factors.
Will I pay much higher rates?
Yes, expect 1-3% higher than prime rates. However, you can refinance to better rates once credit improves.
What are the risks of using a co-signer?
Co-signer is equally liable for the debt. Late payments hurt both credit scores. Consider impact on their debt ratios for future loans.
Should I consider rent-to-own?
Generally no. High fees, inflated prices, and terms favor sellers. Better to improve credit and save for conventional purchase.