Buying a home with bad credit: which loans still work and how underwriting treats you

A score in the 500s or low 600s narrows your programs, raises your price and makes the file manual — but it does not close the door, and federal law gives you tools the lender must honor.

“Bad credit” in mortgage lending usually means a middle FICO score below about 620, a recent bankruptcy, foreclosure or short sale, or open collections and charge-offs. Each of those is handled differently by each loan program, and the difference between a decline and an approval is often paperwork, not the score itself.

Who this profile covers

Lenders pull all three bureaus and use the middle score of each borrower, then the lowest middle score among co-borrowers (some conventional pricing now averages the borrowers’ scores instead). If that number sits between roughly 500 and 639, you are in bad-credit territory for pricing and for most overlays. The same is true with a 680 score and a foreclosure 18 months ago: recent derogatory events matter as much as the number. Thin files — fewer than three tradelines, or no score at all — are a separate case that FHA, VA and USDA handle with non-traditional credit (rent, utilities, insurance), while conventional underwriting can work with a single scored borrower under published conditions.

The programs that fit, and why

FHA is the default home for damaged credit. The published floor is a 580 score for the 3.5% minimum down payment and 500–579 with 10% down; below 500 is not eligible. Most lenders add an “overlay” — commonly 600 to 640 — so shop specifically for lenders that underwrite to the FHA floor. FHA also sets the shortest waiting periods: generally 2 years after a Chapter 7 discharge (12 months of on-time Chapter 13 payments with court permission), 3 years after a foreclosure, short sale or deed-in-lieu, with exceptions for documented extenuating circumstances.

VA loans have no statutory minimum score; the VA asks lenders to judge the whole file and treats a 12-month clean history as the main signal. Lender overlays of 580–620 are common, and the waiting periods are typically 2 years after bankruptcy or foreclosure. USDA guaranteed loans run through the GUS system, which tends to give automated approvals at 640 and above; below that, manual underwriting with stricter ratios is still possible. Conventional (Fannie Mae, Freddie Mac) needs a 620 and carries the longest seasoning: 4 years after Chapter 7, 7 years after a foreclosure, 4 years after a short sale — reduced to 2–3 years only with documented extenuating circumstances. Non-QM and portfolio lenders fill the gap for events less than 12–24 months old, at noticeably higher rates and down payments of 10–25%.

How underwriting treats you

Income is checked harder, not softer: a manually underwritten FHA loan starts at ratios of 31% housing and 43% total debt, stretching to 37/47 or 40/50 only with compensating factors such as verified reserves, minimal payment shock or residual income. Automated approvals with a 640+ score may go higher. Assets: plan on two months of bank statements with every large deposit explained; reserves of one to three months of payments are often required on manual files. Credit: FHA ignores medical collections, but if your non-medical collections total $2,000 or more, the lender must either see them paid, put you on a payment plan, or count 5% of the balance as a monthly debt. Charge-offs are generally not counted by FHA; conventional underwriting mostly lets collections stay open on a one-unit primary residence. Disputed accounts can force a manual downgrade. Occupancy matters because every government program here is for a primary residence; investors with poor credit are pushed toward hard money or DSCR products.

Two tools change outcomes quickly. A rapid rescore lets the lender push a paid-down balance or corrected error to the bureaus in a few business days — lenders generally may not charge you for it. And a written letter of explanation that ties each derogatory item to a dated event (job loss, divorce, medical episode) is what manual underwriters read first.

Typical pitfalls

Applying before disputing obvious errors: an open dispute on a tradeline can knock an automated approval down to manual.
Paying old collections the week before closing without checking that it will not reset the date of last activity.
Paying a credit repair company up front — the Credit Repair Organizations Act prohibits advance fees and promises to remove accurate information.
Accepting the first “yes” from a lender with a 640 overlay when another underwrites to 580, or being steered into a high-cost loan when an FHA loan would fit.
Forgetting that low scores also raise homeowners insurance premiums in most states, which flows straight into your debt-to-income ratio.

What to ask a lender

Ask what the lender’s minimum score is for FHA and VA specifically, whether they do manual underwriting (many do not), whether they accept non-traditional credit, what their rapid-rescore process is, and how a score change after application would change your Loan Estimate. Check the officer’s NMLS ID. If you are declined, the written adverse action notice must give specific reasons and the score used — that letter is your roadmap for the next application. Our guide on the score needed to buy a house walks through each program’s tiers.

What matters most

FHA accepts a 580 score with 3.5% down and 500–579 with 10% down; most lenders add overlays of 600–640, so ask for the lender’s own floor.
VA has no minimum score and USDA approves automatically around 640; conventional loans need 620 and carry the longest waiting periods after a bankruptcy or foreclosure.
Manual underwriting means tighter ratios (31/43 baseline on FHA), documented reserves and a letter of explanation for every derogatory item.
Non-medical collections of $2,000 or more on FHA must be paid, put on a plan or counted at 5% of the balance; medical collections are ignored.
A lender-ordered rapid rescore can update your file in a few business days, and federal law gives you a free dispute process with a 30-day reinvestigation.
A decline must come with an adverse action notice listing specific reasons and the score used — use it to plan the next application rather than re-applying blind.
Advance fees for credit repair are illegal under the Credit Repair Organizations Act; no company can lawfully promise to remove accurate negative items.

Federal rules, read for buyers with bad credit

First-time buyer programs by state

Alabama · Alaska · Arizona · Arkansas · California · Colorado · Connecticut · Delaware · Florida · Georgia · Hawaii · Idaho · Illinois · Indiana · Iowa · Kansas · Kentucky · Louisiana · Maine · Maryland · Massachusetts · Michigan · Minnesota · Mississippi · Missouri · Montana · Nebraska · Nevada · New Hampshire · New Jersey · New Mexico · New York · North Carolina · North Dakota · Ohio · Oklahoma · Oregon · Pennsylvania · Rhode Island · South Carolina · South Dakota · Tennessee · Texas · Utah · Vermont · Virginia · Washington · West Virginia · Wisconsin · Wyoming

Frequently asked questions

What is the lowest credit score that can get a mortgage?

FHA publishes the lowest floor: 500 with a 10% down payment and 580 with 3.5% down. VA sets no minimum at all, but most lenders apply their own floor of 580 to 620. In practice a score below about 580 means finding a lender that underwrites to the FHA minimum and is willing to process the file manually, which is a smaller group than the general market.

How long after a bankruptcy or foreclosure can I buy again?

Typical waiting periods: FHA 2 years after a Chapter 7 discharge and 3 years after a foreclosure or short sale; VA about 2 years for both; USDA generally 3 years; conventional 4 years after bankruptcy and 7 years after a foreclosure, shortened to 2–3 years with documented extenuating circumstances. Chapter 13 can qualify sooner with 12 months of on-time plan payments and court approval on government programs.

Do I have to pay off collections before I can close?

Not always. FHA ignores medical collections and only acts when non-medical collections add up to $2,000 or more — then you pay them, set up a payment plan, or the lender counts 5% of the balance as a monthly debt. Conventional underwriting usually lets collections stay open on a one-unit primary residence. Judgments and tax liens are treated more strictly and commonly must be paid or in a documented repayment plan.

Is a rapid rescore the same as credit repair?

No. A rapid rescore is a lender-initiated update that pushes documented changes — a paid balance, a deleted error — to the bureaus within a few business days, and lenders generally may not charge you for it. Credit repair companies dispute items on your behalf for a fee and are regulated by the Credit Repair Organizations Act, which bans advance payments and promises to remove accurate information.