The number is getting worrisome for buyers. This week Freddie Mac posted the new mortgage rate of 7.40%. Gulp. That’s a three-year high. Luckily for Americans with imperfect credit they have more mortgage routes to investigate, but the easiest lender to say yes may also be the most expensive one to repay.
For buyers already receiving less favorable terms because of their credit history, fees, mortgage insurance and a higher rate can compound the affordability problem.
There is one potentially helpful development. The Federal Housing Finance Agency announced that, as of September 9, all approved Fannie Mae and Freddie Mac lenders may use VantageScore 4.0. The model considers additional information, including rent-payment history, although lenders can still use Classic FICO.
Bob Lovell, founder of Home Marketing Services and a real estate professional who has worked with first-time and credit-challenged buyers since 1997.
“People with bruised credit are often so relieved to hear ‘approved’ that they stop asking what the approval costs,” he says. “I tell buyers to read the loan backward. What will it cost each month, what could make the payment rise and how difficult will it be to sell or refinance?”
Lovell ranks the main loan options, from strongest to riskiest.
VA loan, for eligible borrowers. VA-backed loans take the top position because they commonly require no down payment and no monthly mortgage insurance. The Department of Veterans Affairs does not impose a minimum credit score, although individual lenders set their own standards. A funding fee may apply.
FHA loan. For the general public, FHA is usually the first program worth pricing. Under HUD’s FHA handbook, borrowers with scores of at least 580 may be eligible for maximum financing, generally requiring 3.5% down. Scores from 500 to 579 are limited to 90% loan-to-value, effectively requiring 10% down. Lender requirements may be stricter, and mortgage insurance raises the long-term cost.
USDA loan. USDA financing can provide 100% financing for eligible households purchasing in qualifying rural areas. Credit below 640 does not automatically prevent approval, but it can trigger additional documentation and closer review under USDA credit requirements. Income and property-location restrictions narrow its usefulness.
A conventional mortgage after comparing scoring models. Conventional financing may make sense for applicants whose credit is recovering, particularly if they can reduce private mortgage insurance with a larger down payment. Following the 2026 scoring change, borrowers with strong rent-payment records should ask whether a lender offers VantageScore 4.0. They should still compare the complete cost, not assume a different score guarantees approval.
A qualified co-borrower. A co-borrower may strengthen income, assets or the overall application, but does not erase the primary applicant’s credit history. Both people become legally responsible for the debt. “A relative should never sign because everyone assumes they will be removed from the loan next year,” Lovell says. “Until a refinance actually closes, that mortgage belongs to both borrowers.”
Owner financing. Seller financing may offer flexible underwriting, but interest rates, balloon payments and default provisions require careful scrutiny. Buyers should use an independent real estate attorney and verify that the seller can legally transfer clear title.
Rent-to-own. Option fees and rent premiums can be lost if the buyer cannot qualify for a mortgage before the option expires. A lease-option should specify the purchase price, maintenance obligations and exactly how much rent, if any, becomes a purchase credit.
High-cost non-prime or hard-money financing. These products rank last for ordinary owner-occupants because they may combine a large down payment, high interest, substantial fees and a short refinancing deadline.
“For many buyers, six months spent lowering card balances, correcting report errors and building reserves is cheaper than taking the wrong loan today,” concludes Lovell. “A delayed purchase can hurt. A payment you cannot comfortably carry hurts much longer.”
