Buying a Home with Bad Credit in the US: FHA Limits and What Lenders Still Require

Key Takeaway

FHA loans offer the most accessible path to homeownership for buyers with credit scores as low as 500, though most lenders set their minimum at 580. You will need at least 3.5 percent down with a 580 score or 10 percent down for scores between 500 and 579. Conventional loans typically require 620 or higher and offer better terms for borrowers who qualify. For scores below 500, repairing credit first is almost always the only viable option.

Loan Options Comparison

Loan Type	Minimum Credit Score	Minimum Down Payment	Mortgage Insurance	Best For
FHA	500 (580 for most lenders)	3.5% (10% if 500-579)	Upfront + annual MIP for life of loan (if down payment below 10%)	Buyers with scores 500-620
Conventional	620 (most lenders)	3% to 5%	PMI until 20% equity (cancellable)	Buyers with scores 620+
VA	No official minimum (typically 580+)	0%	Upfront funding fee, no monthly PMI	Eligible veterans and service members
Credit Repair First	Improve to 620+	Varies	Depends on final loan type	Buyers with scores below 500 or time to improve

FHA Loans: The Low-Credit Standard

According to the U.S. Department of Housing and Urban Development, FHA loans backed by the Federal Housing Administration accept credit scores as low as 500 with a 10 percent down payment, or 580 with just 3.5 percent down (HUD, 2026). These are official minimums, but individual lenders impose their own overlays, and most set the floor at 580.

Pros

• Accessible credit requirements (scores as low as 500 officially, 580 in practice).
• Down payment as low as 3.5 percent with a 580 score.
• Debt-to-income ratios up to 43 percent (sometimes 50 percent with compensating factors).
• Gift funds and down payment assistance allowed.
• FHA assumes some lender risk, encouraging approval of borrowers conventional lenders reject.

Cons

• Upfront mortgage insurance premium of 1.75 percent of the loan amount, financed into the loan.
• Annual mortgage insurance premium (MIP) of 0.55 percent to 1.05 percent, required for the life of the loan if you put down less than 10 percent (as explained in foundational texts such as Principles of Finance).
• Loan limits vary by county and cap at $498,257 in most areas, higher in expensive markets (2026 limits; confirm current caps with a lender).
• Stricter property condition standards and appraisal requirements.
• MIP cannot be removed without refinancing to a conventional loan once you reach 20 percent equity.

Who Should Choose FHA

Buyers with credit scores between 500 and 620 who have steady income, manageable debt-to-income ratios, and limited savings for a down payment. First-time buyers and those rebuilding credit after a bankruptcy, foreclosure, or major credit event (waiting periods apply) benefit most from FHA’s accessible terms.

Conventional Loans: Better Terms for Stronger Credit

Conventional loans are not government-backed and carry stricter underwriting. Most lenders require a minimum credit score of 620, though some accept 580 with higher down payments and compensating factors.

Pros

• Private mortgage insurance (PMI) is cancellable once you reach 20 percent equity, unlike FHA’s lifetime MIP.
• No upfront mortgage insurance premium.
• Higher loan limits (conforming limit is $806,500 in most areas for 2026; jumbo loans exceed this).
• Fewer property restrictions and faster appraisals.
• Lower overall cost if you can qualify and plan to stay in the home long enough to cancel PMI.

Cons

• Credit score minimums of 620 to 640 for most lenders.
• Larger down payments often required for buyers with lower scores (10 percent to 20 percent for scores under 680).
• Stricter debt-to-income limits (typically 43 percent, sometimes 50 percent with strong compensating factors).
• Higher interest rates for lower credit scores, narrowing the cost advantage over FHA.

Who Should Choose Conventional

Buyers with credit scores of 620 or higher, especially those at 680 and above who qualify for the best rates and can put down at least 5 percent. If you expect to build equity within a few years and cancel PMI, conventional loans cost less over time than FHA loans with permanent MIP.

VA Loans: Zero Down for Eligible Veterans

VA loans, guaranteed by the Department of Veterans Affairs, have no official minimum credit score, but most lenders require 580 or higher. Eligible veterans, active-duty service members, and some surviving spouses qualify.

Pros

• Zero down payment required.
• No monthly mortgage insurance (one-time funding fee of 1.4 percent to 3.6 percent applies, waived for disabled veterans).
• Competitive interest rates regardless of credit score.
• Flexible underwriting and high debt-to-income tolerance.

Cons

• Eligibility limited to veterans and service members.
• One-time funding fee (can be financed into the loan).
• Some sellers hesitate to accept VA offers due to appraisal requirements, though this is less common than in the past.

Read also: FHA Loan vs. Conventional Mortgage: Which Is Better for Your Credit Score and Down Payment in the US

Who Should Choose VA

Any eligible veteran or service member with a credit score of 580 or higher should explore VA loans first. The zero-down, no-PMI structure beats FHA and conventional options for most eligible borrowers, even with lower credit.

Credit Repair First: The Long-Term Play

For buyers with scores below 500 or those who can wait six to twelve months, repairing credit before applying often yields better terms and lower lifetime costs.

Pros

• Access to conventional loans with cancellable PMI and better rates.
• Avoid FHA’s permanent mortgage insurance.
• Lower interest rates can save tens of thousands over the loan term.
• Larger loan amounts if you qualify for higher limits.

Cons

• Delays homeownership by months or longer.
• No guarantee of approval even after improvement (income, employment, and debt matter too).
• Home prices and interest rates may rise while you wait.

Who Should Choose This Path

Buyers with scores below 500 (few lenders approve FHA at this level) or those with time and the ability to pay down debt, dispute errors, and build positive payment history. If you are currently at 580 to 620 and can reach 680 within a year, the interest rate savings often justify the wait.

What Lenders Still Require Regardless of Loan Type

Credit score minimums are just the entry point. According to the Consumer Financial Protection Bureau, all lenders also evaluate your debt-to-income ratio (total monthly debt payments divided by gross monthly income), employment history (typically two years of steady work), and income documentation (CFPB, 2026). Recent late payments, collections, charge-offs, or judgments can lead to denial even if your score meets the minimum. Lenders also review your payment history for the past 12 to 24 months, not just the three-digit score.

Most require at least two months of mortgage payments in reserve after closing, verifiable through bank statements. Self-employed borrowers face additional documentation requirements (typically two years of tax returns and profit-and-loss statements). Gift funds for down payments are allowed for FHA and conventional loans but must be documented with a signed gift letter confirming the funds are not a loan.

Recommendation by Profile

• Credit score 500 to 579: FHA loan with 10 percent down, or credit repair if you can wait.
• Credit score 580 to 619: FHA loan with 3.5 percent down.
• Credit score 620 to 679: Conventional loan if you have 5 percent to 10 percent down and prefer cancellable PMI; otherwise FHA.
• Credit score 680+: Conventional loan for the best rates and lowest PMI.
• Eligible veterans (any score 580+): VA loan, always.

Conclusion

Buying a home with bad credit in the US is possible, primarily through FHA loans that accept scores as low as 500 (580 with most lenders). FHA offers accessible terms but requires permanent mortgage insurance on low-down-payment loans, increasing lifetime cost. Conventional loans reward higher credit with cancellable PMI and better rates, while VA loans provide the best deal for eligible veterans. For scores below 500, repairing credit first is the only practical path. Confirm current loan limits, lender overlays, and your specific eligibility with a licensed loan officer, as requirements and rates change frequently.

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Financial Disclaimer: This article provides general educational information about mortgage loan programs and credit requirements in the United States. It is not personalized financial, lending, or legal advice. Loan eligibility, interest rates, fees, and program availability vary by lender, location, credit profile, and market conditions. Federal loan limits and program rules change annually. Always verify current terms, confirm your eligibility, and compare offers from multiple licensed lenders before making a borrowing decision. For advice tailored to your specific financial situation, consult a HUD-approved housing counselor or licensed mortgage professional.