How to Buy a House with Bad Credit 2026 (500-580 Score)
YES! You CAN buy a house with bad credit (500-580 score)! Options: (1) FHA allows 500+ credit (10% down), 580+ (3.5% down), (2) VA allows 580+ (0% down for veterans), (3) Non-QM lenders allow 500+ (higher rates). Strategies: Fix credit errors (dispute = +50 points), pay down debt (lower utilization = +30 points), manual underwriting (human review vs automated), second chance lenders (portfolio loans). Rates: 7%-9% (vs 6.5% good credit). Example: 520 credit = FHA approved with 10% down + manual underwriting. Get pre-approved with bad credit. Related: Improve credit guide.
💪 Bad Credit Mortgage Options 2026:
FHA 500-579 Credit: 10% down, manual underwriting, 7.5%-8.5% rate
FHA 580+ Credit: 3.5% down, automated approval, 7%-8% rate
VA 580+ Credit: 0% down (veterans), manual underwriting, 6.5%-7.5% rate
Non-QM 500+ Credit: 15-25% down, bank statements, 8%-10% rate
⏰ Bad credit ≠ No mortgage! Just different options!
Mortgage Options for Bad Credit (500-580)
| Loan Type | Min Credit | Down Payment | Rate | Best For |
|---|---|---|---|---|
| FHA (500-579) | 500 | 10% | 7.5%-8.5% | Very bad credit, have 10% saved |
| FHA (580+) | 580 | 3.5% | 7%-8% | Bad credit, limited savings |
| VA (Veterans) | 580+ | 0% | 6.5%-7.5% | Veterans/military with bad credit |
| Non-QM | 500+ | 15-25% | 8%-10% | Self-employed, complex income |
| Portfolio Lender | 550+ | 20-30% | 8%-11% | Unique situations, local banks |
🎯 Get Approved with Bad Credit!
Second chance lenders specialize in bad credit! Get pre-approved!
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5 Strategies to Get Approved with Bad Credit
Strategy #1: Fix Credit Errors (Fast +50 Points)
Best for: Recent credit damage, errors on report.
Common Errors to Dispute:
- Wrong balances: Card shows $5K, you paid it off = dispute
- Accounts not yours: Identity theft, wrong person = dispute
- Late payments you didn't make: Autopay failed = dispute
- Duplicate accounts: Same debt listed twice = dispute
- Closed accounts showing open: Paid off car loan = dispute
Action: Pull credit report (free at AnnualCreditReport.com), dispute errors online (30 days to resolve). Can boost score 30-100 points!
Strategy #2: Pay Down Credit Cards (Fast +30 Points)
Best for: High credit card balances (utilization >50%).
Credit Utilization Impact:
Before: $4,000 balance ÷ $5,000 limit = 80% utilization (BAD)
After: Pay down to $1,500 = 30% utilization (GOOD)
Score Boost: +20 to +50 points in 30 days!
Target: Get utilization under 30% on ALL cards. Under 10% = even better!
Strategy #3: Manual Underwriting (Human Review)
Best for: Borderline credit (570-620), compensating factors.
Manual Underwriting Advantages:
- Human review: Not just automated score rejection
- Compensating factors: High income, big down payment, stable job
- Explanation letters: Explain medical debt, divorce, job loss
- Alternative credit: Rent, utilities, phone bills count
Example: 560 credit BUT 20% down + 5 years same job + low DTI = APPROVED via manual underwriting!
Strategy #4: Larger Down Payment (15-20%)
Best for: Have savings, want lower rate despite bad credit.
Down Payment Impact:
10% Down: FHA minimum for 500-579 credit
15% Down: Better rates, easier approval
20% Down: No PMI, best rates, highest approval odds
25%+ Down: Portfolio lenders = very flexible
Trade-off: More cash upfront = lower monthly payment + easier approval!
Strategy #5: Second Chance Lenders (Non-QM, Portfolio)
Best for: Very bad credit (500-550), denied by traditional lenders.
Second Chance Lender Types:
- Non-QM Lenders: Bank statements, 500+ credit, 15-25% down
- Portfolio Lenders: Local banks/credit unions, keep loans in-house
- Hard Money: Asset-based (home value), 12-18% rates (short-term)
- Seller Financing: Owner carries mortgage, flexible terms
Rates: 8%-12% (higher than FHA), but you GET APPROVED!
⏰ Get Pre-Approved with Bad Credit!
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Real Example: 520 Credit Score Approved
Case Study: First-Time Buyer with Bad Credit
Buyer's Situation:
Credit Score: 520 (medical debt + late payments)
Income: $65,000/year
Savings: $25,000
Debts: $300/month (car + credit cards)
Job: 4 years same employer
❌ First Attempt (Conventional):
Result: DENIED (need 620+ credit for conventional)
Issue: Automated underwriting rejected due to score
✅ Second Attempt (FHA Manual Underwriting):
Loan Type: FHA (500-579 tier)
Down Payment: $20,000 (10% on $200K home)
Rate: 7.75%
Monthly Payment: $1,450 (PITI + PMI)
DTI: 32% ($1,750 total debt ÷ $5,417 income)
Result: APPROVED! Manual underwriting considered stable job + large down payment!
💡 Key Factors:
- 10% down payment (FHA 500-579 requirement)
- Manual underwriting (human review vs automated rejection)
- Compensating factors (stable job, low DTI, large down payment)
- Explanation letter (medical debt from surgery, now paid off)
How to Improve Credit Before Applying
30-Day Credit Boost Plan:
Week 1: Pull Credit Reports + Dispute Errors
- Get free reports from all 3 bureaus
- Identify errors (wrong balances, accounts not yours)
- File disputes online (30-day resolution)
- Potential Boost: +30 to +100 points
Week 2: Pay Down Credit Cards
- Target cards with highest utilization first
- Get ALL cards under 30% utilization
- Pay before statement date (reports lower balance)
- Potential Boost: +20 to +50 points
Week 3: Become Authorized User
- Ask family member with good credit to add you
- Their payment history = your payment history
- Choose card with low utilization + long history
- Potential Boost: +10 to +40 points
Week 4: Apply for Pre-Approval
- Apply to 3-5 lenders within 14 days (counts as 1 inquiry)
- Include FHA lenders (accept lower scores)
- Request manual underwriting if needed
- Total Boost: 60-190 points possible in 30 days!
Bad Credit Mortgage FAQs (2026)
Q: What's the lowest credit score to buy a house?
A: FHA allows 500+ credit (10% down). VA allows 580+ (veterans). Non-QM allows 500+. Realistically, 580+ = much easier approval.
Q: How much higher is the rate with bad credit?
A: 1%-2.5% higher. Example: 740 credit = 6.5% rate. 580 credit = 7.5%-8% rate. 520 credit = 8%-9% rate (FHA/Non-QM).
Q: Should I wait to improve credit before buying?
A: Depends! If you can boost 30+ points in 30-60 days (fix errors, pay debt), WAIT. If credit won't improve soon, buy now with FHA + refinance later when credit improves.
Q: Can I refinance later to get a better rate?
A: YES! Buy now with bad credit (7.5%-8% rate). Improve credit over 12-24 months. Refinance to 6%-6.5% rate. Save $200-$400/month!