Posted March 10, 2026 in Blog / Education
How to Qualify for a Mortgage with Bad Credit
One of the most common things Fairway Heartland hears from potential homebuyers is this: ” I probably can’t qualify for a mortgage because my credit is bad.” In many cases, that assumption is incorrect.
Fairway Heartland has worked in the mortgage industry for more than two decades and has helped many borrowers purchase homes who initially believed their credit would prevent them from qualifying. The reality is that a credit score is only one piece of the mortgage approval puzzle. Income, down payment funds, debt-to-income ratios, credit history patterns, and even life circumstances all play a role in whether a mortgage lender in Sioux Falls can approve a home loan.
Understanding what “bad credit” really means and how borrowers can still qualify for a mortgage can change how buyers view their options.
What is Considered Bad Credit for a Mortgage?
Many people assume that anything below a 700 credit score is bad. From a mortgage standpoint, that is not necessarily accurate. In most cases, bad credit typically falls around 640 and below. Even then, qualification depends on the borrower’s entire financial profile and how credit scores are used for mortgages.
Here is how lending generally works in real-world mortgage scenarios. A credit score above 620 generally increases the likelihood of qualifying for a mortgage, provided the borrower has stable income and reasonable debt levels. Borrowers in the low 600s can sometimes still be approved, particularly with FHA loan programs, which have more flexible credit guidelines. Scores below 580 usually require borrowers to improve their credit profile before qualifying. That does not mean homeownership is impossible. It simply means some preparation is needed.
It is also important to understand something many people overlook. A credit score does not tell the entire story. Mortgage lenders examine the credit profile, including payment history, types of debt, and how recently financial issues occurred.
Credit Issues That Can Stop Mortgage Approvals
Over the years, several common credit problems tend to prevent someone from qualifying for a home loan.
Recent Late Payments
Recent late payments are one of the biggest red flags for lenders.
They can dramatically lower a credit score and suggest that the borrower may struggle to make future payments. Mortgage lenders pay close attention to late payments within the past 12 months.
When borrowers demonstrate 12 to 24 months of solid payment histroy, it often provides enough time for credit to recover.
High Credit Card Balanace
Using most or all of the available credit limit can negatively impact a credit score.
A good rule of thumb is to keep credit card balances below 50 percent of the available limit, and ideally much lower.
Borrowers who use credit responsibly and pay balances regularly show lenders that they can manage debt effectively.
Collections and Charge-Offs
Collections and charge-offs indicate that a borrower failed to repay a debvt after multiple attemtps by creditors.
In many cases, collections must be resolved before closing on a home loan.
However, there are exceptions. For example, medical collections are sometimes treated differently and may not prevent mortgage approval.
Judgments
Judgments are typically a hard stop for mortgage approvals.
A judgment can attach to the property title and take priority over the mortgage lender’s position. Because of this, judgments must usually be paid before closing.
Excessive Credit Inquiries
Multiple credit pulls in a short period can negatively impact a credit score and may signal finacial distress.
Mortgage lenders want to see responsible credit usage, not a pattern of frequent borrowing.
A Real Case Study: Turning Bad Credit Into Homeownership
Fairway Heartland recently worked with a homebuyer whose situation initially appeared challenging. He had a credit score in the low 600s and nearly twenty thousand dollars in civil judgments. His credit profile was not strong, and he had very little saved for a down payment. Initially, his loan application was declined. However, his income was strong and his debt-to-income ratio fell within mortgage guideliens, which meant the situation was not impossible.
A plan was created. The borrower began aggressively playing down the judgments over the following year. During that time, it was emphasized that every payment moving forward had to be perfect. Any new late payment could significantly reduce the chances of approval. The circumstances behind the credit history were alos documented throuh a detailed letter of explanation. Within a year, the judgments were paid off and enough funds had been saved for a down payment. The borrower’s real estate agent negotiated seller-paid closing costs, which helped reduce the amount of cash required at closing. An FHA loan with a 3.5% down payment was ultimately used, and the borrower was able to move forward with purchsing a home.
The key takeaway is simple. The credit profile was not perfect, but the full financial structure made approval possible.
Steps to Qualify for a Mortgage With Bad Credit
For buyers hoping to purchase a n the next six to twelve months, several actions can significantly improve the chances of approval.
Make Every Payment on Time
This is the most important step.
Recent late payments are major credit setbacks. Lenders want to see that borrowers are currently managing their financial obligations responsibly.
Lower Credit Card Balances
Reducing credit card balanaces can improve credit scores and lower debt ratios.
Keeping balances below half of the available credit scores and lower debt ratios.
Keeping balances below half of the available credit limit is a good starting point, through lower utilzation is always better.
Pay Off Collections and Judgments
Outstanding collections and judgments often prevent mortgage approvals.
Resolving these debts demonstarates responsibility and removes potential underwriting obstacles.
Avoid Excessive Credit Inquiries
Multiple credit applications can reduce credit scores and create concerns for lenders.
Buyers planning to purchase a home should limit new credit applications.
Consider a Secured Credit Card
A secured credit card can be a useful tool for rebuilding credit.
Because the card is backed by a deposit, it reduces risk for the bank and allows borrowers to demonstrate responsible credit usage.
Why Buyers Should Never Assume They Cannot Qualify
One of the biggest misconceptions about mortgages is that a single number determines the outcome. In reality, mortgage underwriting evaluates the entire financial picture. Down payment funds, reserve savings, income stability, and debt ratios can sometimes offset moderate credit issues. Medical collections, temporary financial hardships, or isolated late payments do not automatically eliminate someone from homeownership.
Many buyers believe they have bad credit, only to discover the issue is a high credit card balance or a few missed payments from years ago. Situations like these often do not prevent someone from buying a home. The most imporetant step is simply having a conversation with a knowledgeable lender. The worst case scenario is discovering that qualification is not possible today. When that happens, a strong lending team can help create a clear plan so the borrower can qualify in the future. And in many cases, that timeline is shorter than expected.
The Bottom Line
Bad credit does not automatically prevent someone from qualifying for a mortgage. In many situations, the question is not whether someone can qualify, but when they will qualify. With the right strategy, improved payment history, and responsible credit management, many borrowers who once believed homeonwerhsip was impossible are able to purchase a home. And the process begins by understanding the full finacial picture with the right mortgage team.
If you are unsure whether your credit situation qualifies you for financing, speaking with a trusted mortgage lender in Sioux Falls can help you understand your options and create a plan for buying a home.
