The government can provide you assistance in the form of a loan when you need money. If you have bad credit and need funds, this may be an option worth considering.

The U.S. government offers loans designed for specific purposes, such as to fund an education, start a business, or buy a home. In most cases, you can get funds at a lower interest rate and qualify with a lower credit score.

“Seeing if you qualify for government loans can save you a lot of money and help make qualifying easier,” says Teresa Dodson, debt expert and founder of Greenbacks Consulting. “Always look into these opportunities first,” she encourages. 

In this guide, we’ll discuss the types of government loans for bad credit you can get and alternatives you may want to consider.

Can You Get a Government Loan With Bad Credit?

Yes, government loans serve borrowers who don’t qualify from traditional lenders for reasons such as a lower credit score. Government loans can be guaranteed loans or direct loans.

With guaranteed loans, the funds are lent by a government-approved lender, and the government guarantees to cover the losses if you default. This makes it easier for lenders to provide credit to borrowers with poor credit.

With direct loans, the loan is extended by a government agency, and all payments are made to the government. If you qualify, the benefits make it an attractive option.

Government Loans You May Qualify for With Bad Credit

The loan finder tool is a good starting point to find government loans for bad credit you may qualify for. Here are a few loans you may qualify for:

  • FHA loans can help you buy a house with bad credit. These loans have low down payment requirements and are accessible to borrowers with poor credit (500-580).
  • Active-duty service members, veterans, and surviving spouses may qualify for VA loans to purchase a home with a lower credit score.
  • Rural homebuyers can qualify for USDA loans when purchasing a home in eligible locations.
  • Small business loans can get SBA loans to start or grow a business.
  • If you’re a federal employee, you may qualify for an emergency hardship loan through the Federal Employees Education and Assistance Fund (FEEA).

Types of Bad Credit Government Loans Available

There are many government loans for bad credit available for different purposes, such as for buying a house, for personal hardship, or business. Here’s a deeper look into the types of loan programs available.

Home Loans

If you can’t qualify for a conventional mortgage due to your credit score, here are a few government home loan options to consider:

  • FHA Loans: You can qualify for an FHA loan with a credit score of 500 if you can put down 10%. You’ll only need a 3.5% down payment if your credit score is 580.
  • VA Loans: You may qualify for a VA loan with a credit score of 500 if you’re a military service member, veteran, or surviving spouse. VA loans don’t require a down payment, but you’ll need to pay a funding fee.
  • USDA Loans: USDA loans are zero down payment loans for those buying a home in eligible towns and rural areas. If you have a credit score of at least 640, you may qualify for this loan.
  • FHA 203(K) Loans: With this loan, you can purchase or refinance a home that needs a lot of work. The renovation costs can be rolled into the mortgage so you can pay for renovations over time. You’ll need a credit score of 500 or more to qualify.

Small Business Loans

The federal government also has options for borrowers who want to start, expand, or improve a business. The Small Business Administration offers a number of options for businesses of all sizes.

SBA loans allow you to borrow $30,000 to $5 million, and while there isn’t a set credit score requirement, you can expect most borrowers to require a credit score of 650 or higher for 7(a) loans. Another option is to apply for SBA Microloans for loans of up to $50,000 to start a new business. You may be able to qualify for these loans with a credit score of 620 or more.

If your business has suffered from economic and physical damage due to a declared disaster, you can also apply for an SBA disaster loan, which is available for homeowners as well as business owners.

Personal Loans

While the government doesn’t specifically offer personal loans for bad credit, you may be able to get financial assistance in the form of an emergency hardship loan through the Federal Employees Education and Assistance Fund (FEEA) if you’re a federal employee.

If you have suffered from a hardship, such as severe injury or illness, identity theft, violent crime, or damage to your primary residence, you may qualify for a no-interest loan of up to $1,500 for eligible expenses.

However, the government doesn’t offer unsecured loans for bad credit for any purpose, such as debt consolidation, wedding expenses, or vacations.

Improve Your Credit Score Before Applying for a Government Loan

While you may qualify for government loans for bad credit we’ve listed above, improving your credit score can make it easier to get access to a number of other loan programs. Here are a few tips to follow to improve your credit score:

  • Check your credit reports periodically to make sure all information on file is accurate.
  • Check your credit report for errors and correct them before you apply for a loan.
  • Pay all your bills on time. On-time payments can increase your credit score.
  • If you have a lot of credit card debt, pay it down to improve your credit utilization rate.
  • Use a good mix of credit, including revolving credit and installment loans.

Alternative Options to Government Loans

If you don’t qualify for government loans for bad credit, know that there are many other options available.

Consider Non-Profit Organizations

Non-profit organizations usually serve underserved business owners and individuals and have lenient lending guidelines. For example, Community Development Financial Institutions (CDFIs) serve low-income communities with access to loans and products even with bad credit. Non-profit organizations may also offer microloans of up to $50,000 to businesses that qualify.

Explore Private Lenders Specialized in Bad Credit Loans

While it may be difficult to qualify for a loan from a traditional lender, there are many private online lenders that specialize in bad credit loans. These lenders typically have lower minimum credit score requirements, so it may be easier to qualify.

When borrowing from an online lender, it’s important to compare interest rates, fees, and repayment terms. You’ll likely pay higher interest rates, but if you don’t qualify for government loans, this may be a viable way to borrow money with bad credit.

Get a Government Loan With a Low Credit Score

If you’re considering a government loan for bad credit, start by checking to see if there’s a federal loan program that meets your specific needs. If you need a loan for housing, business, or education, you may be able to find a few options.

If you need a personal loan, a government loan may not be the right choice. We recommend looking into online lenders or credit unions since these are more likely to work with borrowers with a bad credit score.