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How to Get a Home Loan with Bad Credit in New York

Renee Cherez

Renee Cherez

Find out how you can get a mortgage with poor or bad credit in New York. Learn about how you can get approved and which programs and lenders help New Yorkers with bad credit become homeowners.
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Buying a home is one of the biggest investments one can make, but what happens if your credit score is not good?

Buying a home is still possible with bad credit in New York albeit a bit more challenging.

New York is a place of options and there is no shortage when it comes to purchasing a home in the big city even if your credit score isn’t squeaky clean.


How to Get a Home Loan with Bad Credit

  • Normally, bad or poor is considered a credit range between 300-579. However, mortgage lenders rank credit scores a little differently making a credit score below 500 "bad".
  • The absolute minimum credit score needed to qualify for a mortgage differs from lender to lender and program to program.
  • The minimum score needed to vary anywhere from 500 to 660 for government-backed programs like FHA loans, Fannie Mae Home Ready, and Freddie Mac Home Possible.
  • VA loans allow veterans to get a mortgage even for some applicants whose scores may be below 500.
  • Credit scores in a "good" range can qualify a borrower for interest rates over a whole percentage lower than a borrower with "fair" or "poor" credit.
  • A bad credit score will also require that the home buyer put down a higher down payment at 10% than a buyer with good credit, who might be able to put as little as 3.5% down.

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What is Considered a Bad Credit Score for a Home Loan?

According to Experian’s FICO Score chart, credit scores between 300-579 are considered ‘poor’.

This is a general interpretation of the score ranges. What mortgage lenders may consider 'poor' will vary from other types of creditors.

A bad credit score when looking to qualify for a home loan is 500.

While this does all into the 'poor' range, an applicant with a 520 credit score may even qualify for a home loan in certain circumstances.

Why is Credit So Important When It Comes to Mortgages?

Credit scores show lenders how responsible you are when the time comes for repayment.

Your credit will determine if you’ll get a mortgage and what interest rate you are obligated to pay.

It’s important to note that you do not need perfect credit to get a mortgage, however, the higher your score, the more likely you will receive a mortgage with lower interest rates.

What Are the Average Home Prices in New York?

In 2019, New York City’s average listing price was nearly $1,000,000.

In Brooklyn, the average home costs around $1 million while in Manhattan the average price can be well over $1 million.

Queens maintains a middling range, with prices averaging well under a million, but fetching higher prices than the Bronx and Staten Island.

The average home cost in the Bronx and Staten Island proves to be the most affordable, with averages hanging around $500,000 and $600,000, respectively.

What is the Minimum Credit Score Needed for Bad Credit Score Mortgages?

The minimum credit score needed for someone who has a bad or poor credit score is dependent on the lender.

However, the score requirements rely heavily on the type of mortgage you are applying for.

There are various mortgage programs supported by federal programs that have rigorous qualification guidelines, that include specific credit score requirements.

The credit scores required by federally funded mortgage programs are usually lower than traditional mortgages or mortgages that are not insured or underwritten by programs run by the government.

In most cases, the minimum credit score needed to obtain a mortgage is 500.

Minimum Credit Required for Bad Credit Mortgage Loans by Loan Type

The credit score specifications for a mortgage can vary, depending on the type of loan and lender.

There are a few common mortgage types: Federal Housing Administration Loans (FHA), United States Department of Agricultural Loans (USDA), and Veterans Affairs Loans (VA).

These programs are government-backed which means once you are approved, the government guarantees the loan for the bank.

On the contrary, conventional loans are those that are not secured by a government entity but are available through banks, credit unions, mortgage companies, and private lenders.

With that said, there are two conventional government-sponsored enterprises (GSE): Fannie Mae Home Ready and Freddie Mac Home Possible.

Federal Housing Administration Loans (Minimum 500)

Federal Housing Administration loans (FHA) are designed for the first time, low to moderate-income homebuyers.

It is possible to get a mortgage with a credit score of 500, however, applicants with scores between 500 to 579 are required to make a down payment of 10% to qualify.

Applicants with a credit score of 580 or higher can qualify for a loan with a down payment as low as 3.5%.

Mortgages are issued by similar lenders that offer conventional loans, like credit unions, banks, and mortgage brokers, however, the strict FHA guidelines must be followed.

Fannie Mae Home Ready (Minimum 620)

Fannie Mae Home Ready mortgages are conventional home loans offered by Fannie Mae with the goal of helping low and moderate-income borrowers buy or refinance a home.

Home Ready loans lower the down payment and mortgage insurance qualifications.

They also provide more flexibility when it comes to contributions from other co-borrowers and other persons who may live in the home. Another advantage of Home

Ready is you don’t have to be a first time home buyer to qualify to refinance or purchase with Home Ready.

Here are a few requirements you will need to satisfy:

  • Willingness to participate in homeownership education
  • A minimum credit score of 620
  • Earn an income less than or equal to the area income median (AMI). This means you cannot earn more than the average income of the area in which you wish to purchase a home.

Freddie Mac Home Possible (Minimum 660)

Freddie Mac Home Possible is a unique mortgage program designed for first-time homebuyers with moderate income and allows down payments as low as 3%-5%.

Home Possible programs can offer decreased premiums and mortgage insurance rates, offering further flexibility with credit terms and options for refinancing for existing homeowners.

The residency requirements for the Home Possible program include one-to four-unit owner properties and any eligible manufactured home.

To qualify for a Freddie Mac Home Possible mortgage, you’ll need to satisfy the debt-to-income requirements for the program.

This means 43% to 45% of your gross earnings will go towards your monthly debts.

Your income must also adhere to the guidelines based on the location of the home you would like to purchase.

Freddie Mac’s website offers an eligibility tool to avoid confusion and the minimum credit score required is 660.

Homebuyers interested in the Home Possible program must also be considered a first time home buyer.

If you owned a home in the past it’s fine, however, you cannot have been on a title or loan for another property within three years of applying for the Home Possible program.

Lastly, you will need to meet the homebuyer education course requirements to obtain a Home Possible loan.

USDA loans (Minimum 581)

The United States Department of Agricultural (USDA) loans does not have a firm FICO score requirement, however, a score of 640 or higher is recommended.

The USDA utilizes a tool called Guaranteed Underwriting System (GUS) which automates the process of evaluating the risk of potential borrowers to make the qualification process quicker.

Individuals with credit scores lower credit scores may still qualify for the USDA loans using manual underwriting though they involved stricter rules.

Manual underwriting means though you did not automatically qualify for a loan, you can still qualify with the assistance of compensating factors such as low debt and cash reserves.

However, these loans are of no consequence within the city limits of New York City as it is an urban environment and there are no rural areas.

USDA loans are best explored for rural areas outside of the five boroughs.

VA loans (None)

If you, your spouse or immediate family member is a current or former member of the military, there is no credit score minimum when buying a home.

The U.S. Department of Veterans Affairs insures VA home loans and makes it possible for veterans to purchase homes with limited challenges.

Though a low credit score won’t stop you from receiving a VA loan, a higher score will increase your chances of better interest rates and loan terms.

Which Type of the Loan is Right for You?

With the many mortgage options available, you will need to choose which loan type is best for you and your specific financial and personal situation.

Here are some examples to know what loans are right for you:

FHA Loans

  • You have limited savings for a down payments
  • Looking to live in your home long term--with either a 15 or 30-year term.
  • FHA loans require payment of mortgage insurance, either upfront or over the course of the loan. It is around 1% of the cost of the loan amount.
  • Most FHA loans are limited to $417,000 with little flexibility.

VA Loans

  • You served 90 consecutive days during wartime, 180 days during peacetime or 6 years in the reserves.
  • The home cannot be a “fixer-upper” and must be your primary residence.

USDA Loans

  • You must be a borrower in a rural area experiencing financial hardship.
  • Your debt cannot exceed your income by more than 41%.
  • Required to purchase mortgage insurance.

What Are the Mortgage Rates if You Are Applying With a Bad Credit?

If you are applying for a mortgage with bad credit, mortgage rates are typically higher than for those with good credit.

Good credit mortgage rates are around 3.27% and 3.68% while bad credit mortgage rates are between 4.33% and 4.82%.

Should You Prequalify for a Loan Before Looking for a Home?

It can’t hurt to be pre-approved for a mortgage before looking for a home.

This will help in seek out any barriers to approval such as a low credit score or excess debt.

Prequalifying for a loan will also help you to identify what price range you should stick to when house hunting.

Can You Apply for a Mortgage with Bad Credit and No Down Payment?

It is possible to apply for a mortgage with bad credit but it will be difficult to avoid paying a down payment.

FHA loans require a down payment of 3.5% to qualify for mortgage loan programs if credit scores are 580 or higher.

Homebuyers with credit scores between 500-579 will be required to pay a minimum down payment of 10%.

What Income Should you Have to Qualify for a Loan?

To qualify for a loan, most lenders require borrowers to maintain housing costs of 28% or less of their pretax income.

Your total debt, which includes your housing costs, cannot exceed 36% of your pretax earnings.

FHA loans will qualify borrowers with housing costs up to 31% of their pretax earnings and allow total debts up to 43% of pretax income.

How Much Can You Afford? (Calculator)

Knowledge is power!

Use our mortgage affordability calculator to get a clearer picture of where you stand financially to buy home.

Input information on the loan type, your financials, monthly expenses, and estimated property taxes.

Which Lenders Offers Mortgage Loans for a Bad Credit in New York?

Local Lenders National Lenders Online Lenders
Citizens Bank, NA Citi Bank SoFi
Guard Hill Financial Corporation Wells Fargo Quicken Loans
Meadowbrook Sun Trust Rocket Mortgage
FM Home Loans Chase Guaranteed Rate
M&T Bank Network Capital Better Mortgage Corporation
Bank of America Reali Loans
Fairway Independent Mortgage
NBKC
Network Capital

You Can Have More Options By Improving Your Credit

Having poor credit clearly does not bar an applicant from being approved for a loan if you have the right tools and information.

Your income, assets, and debt also factor in when lenders make a decision.

Knowing that there are options for homebuyers with credit that's below 600 is reassuring and opens up the possibility of owning a home to many more Americans.

Nevertheless, if you are thinking of buying a home the most important takeaway would be to either safeguard or work on improving your credit.

If your credit is less-than-stellar, there are ways to improve your credit or prevent it from slipping any further.

The key to doing this is by understanding how your credit is calculated.

The two things that have the largest impact are if you pay your bills on time and the amount of debt you have in relation to your limit.

Other factors are the length of your credit history, new inquiries, and the amount and types of credit you have available to you.

If your score is low because you have high balances, you can easily bring up your score by paying them down.

If your score has suffered from late payments 30 days or longer, it will take a little longer to see your credit improve, as it can only improve over time with corrected behavior.

Never miss another payment again.

Find out more ways to improve credit by reading How to Improve Your Credit Score to Get Approved for an Apartment

While it may be possible to get a mortgage with a credit score of 580, you won't be reaping the greatest benefits.

It's definitely worth investing the time and effort into improving your credit before you look for a home.

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