How To Buy A House With Bad Credit: Home Loan Options And More

If you’re looking to buy a house, you’ve likely heard about the importance of having a good credit score. But what if your credit is still on the come up? You’ll be happy to know that it is possible to get a mortgage with bad credit – even if it’s a bit more challenging.

Let’s explore how to buy a house with bad credit and the loans that may help you do so.

Can You Buy A House With Bad Credit?

There’s no doubt that getting a mortgage with bad credit is more difficult; but it’s not impossible. While lenders do consider your credit score in the home loan approval process, it’s not the only determining factor.

Mortgage lenders also assess: 

• Your income: Lenders prefer borrowers with a stable, predictable income. This not only includes income from work, but also other sources of income such as investments.
• Your debt-to-income ratio (DTI): DTI refers to the amount of your monthly income that goes toward paying debt. A high DTI may reveal to lenders that you’re not currently in the position to take on more debt.
• Your down payment: A down payment is the price you’ll pay upfront when you close your home loan. Generally, making a down payment of at least 20% gives you the best loan interest rates. However, your down payment can be as low as 3%, depending on your loan.
• Your assets: Having assets that are high in value shows lenders that you’re able to pay your monthly mortgage payment, even if you happen to lose your primary source of income.

What Is Considered A Bad Credit Score?

So, what exactly is considered a bad or good credit score? According to Experian™, one of the three main credit bureaus, base credit scores on the FICO^® Score range are:

• Excellent: 800 – 850
• Very good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Poor: 300 – 579

Lenders usually use these ranges to set a minimum credit score requirement that is required for borrowers to take out a mortgage.

How To Get A Home Loan With Bad Credit By Loan Type

Bad credit home loans are loans that usually have lower or more flexible credit requirements. Consider some of the home loan options available to you and their respective average credit score requirements.

FHA Loan

An FHA loan is insured by the Federal Housing Administration (FHA). These loans have low down payment options and lower minimum credit score requirements, which may appeal to first-time home buyers.

Technically, you can qualify for an FHA loan with a credit score as low as 500. However, the lower your credit score, the higher your down payment must be.

An FHA loan requires a minimum 3.5% down payment for credit scores of 580 and higher. If you can make a 10% down payment, your credit score can be in the 500 – 579 range. Rocket Mortgage^® requires a minimum credit score of 580 for FHA loans.

VA Loan

A VA loan is backed by the U.S. Department of Veterans Affairs (VA), and is available to eligible active service members, veterans or eligible surviving spouses.

VA loans do not require down payments. There’s also no monthly mortgage insurance, along with lower interest rates and no specific minimum credit score. However, the minimum median credit score for a VA loan from Rocket Mortgage is 580.

USDA Loan

Backed by the U.S. Department of Agriculture (USDA), a USDA loan provides affordable homeownership opportunities for those living in eligible rural areas.

For this type of loan, most lenders require a credit score of 640 or higher. But you may still qualify even if your score falls a bit below this number.

You do not have to make a down payment and will likely pay lower interest rates with a USDA loan. However, you’ll still need to pay closing costs.

Conventional Loan

Conventional loans are home loans that have no government backing. Rather, they’re funded by a private financial lender and usually purchased by a government-sponsored enterprise (GSE) like Fannie Mae and Freddie Mac.

The requirements for conventional loans vary, but they usually have stricter requirements than government-backed loans, like FHA or VA loans.

To qualify for a conventional loan, you’ll usually need a credit score of 620 or more.

Tips For Buying A House With Bad Credit

So far, we’ve discussed some home loan options that may help you to buy a house, even with a lower credit score. Now, let’s consider some helpful tips.

Compare Lenders

When your credit is less than ideal, you’ll want to compare mortgage lenders in order to increase your chances of buying a house with the best terms. Why? Because each mortgage lender varies in the type of home loan and rates that they offer. The best lender for you may not be a good fit for someone else.

Consider getting a mortgage Loan Estimate from at least three different lenders to have access to the best possible rates.

Get A Co-Signer

Getting someone to co-sign a mortgage could be an effective way to buy a house with a lower score.

When someone co-signs your mortgage, they assume responsibility for your loan if you are somehow unable to pay your lender. Many primary borrowers choose to ask their family members or a trusted friend to be their co-signer. No matter who you choose, your co-signer should be someone with a high credit score, a strong credit history and enough income to cover payments, if absolutely necessary. .

When it comes to credit specifically, lenders use the best credit score between a primary borrower and a co-signer. So, if your credit score is low, having a co-signer with good credit can be beneficial.

It is wise, though, to weigh the pros and cons of getting a co-signer. Keep in mind that as a primary borrower, you have the power to negatively affect your co-signer. If somehow you stop paying your mortgage each month and can’t repay the loan, your co-signer’s credit can decrease significantly.

So, if you aren’t sure that you can afford a certain mortgage payment without help, it may be best to look for a more affordable property or wait until your financial situation improves.

Save For A Down Payment

As we briefly discussed earlier, the more money you can put toward a down payment, the better your chances are of getting a home loan with bad credit.

Consider some helpful ways to save for a down payment:

• Determine your savings goal
• Create a budget
• Add your down payment savings to your budget
• Open a separate savings account
• Automate your savings
• Pay down debt
• Cut extra spending costs
• Increase your income by getting a side hustle
• Reduce your car payment and other bills
• Stop paying toward other savings goals temporarily

Another especially impactful way to build your down payment is to seek down payment assistance. Down payment assistance is often helpful for prospective home buyers who need financial assistance. However, this type of assistance only applies to certain types of mortgage loans and certain types of borrowers, like first-time home buyers. It may be helpful to talk with your lender about your assistance options, as well as do your own research.

Some common down payment assistance programs include housing grants, deferred-payment loans, forgivable loans and low-interest loans.  

Improve Other Qualifying Factors

There are other qualifying factors you may want to improve to increase the chance of being approved for a home loan.

For example, you might consider paying off debt which can help lower your DTI. Your DTI compares your monthly debts to your gross monthly income. The exact DTI needed to qualify for a mortgage varies by loan type. But generally, you’ll want your debt-to-income ratio to be 50% or lower.

How To Improve Your Credit Score Before Buying A House

The higher credit score you have, the better chance you’ll have at the best home loan rates. So, if your credit isn’t ideal, you’ll want to take steps to improve it.

To improve your credit score before buying a house, you’ll want to:

• Make regular on-time payments: Your payment history makes up 35% of your credit score. Thus, one of the quickest ways you can improve your credit is to make regular, on-time payments on all of your accounts each month.
• Limit your credit usage: Credit scoring models view low credit usage as an indication that you’re not overspending and you’re managing your credit responsibly. Aim to keep your credit usage below 30%.
• Keep a diverse credit mix: A credit mix refers to the different types of credit accounts you have. If you can successfully manage different types of credit accounts over time,your credit score will be positively impacted.

• Check your credit report for potential errors: Your low credit score may not be any fault of your own. Make sure that your low credit isn’t the result of a mistake. Carefully check each of your credit reports for errors and report any you find.

• Avoid closing a credit card: You may think that closing your credit card is a wise idea if you have poor credit. However, closing your account will increase your balance/limit ratio – your credit card balance divided by your credit limit. This will lower your credit score even more. Instead, you may consider working to improve your credit using the aforementioned suggestions.

FAQs For Buying A House With Bad Credit

What is the lowest credit score to buy a house?

Most mortgages require borrowers to have a credit score of at least 620. However, government-backed home loans usually have lower credit requirements than conventional fixed-rate loans and adjustable rate mortgages (ARMs).

Can I buy a house with a credit score of 500?

While having a credit score of 500 may limit your mortgage options, it’s still possible to buy a house. With a government-backed loan like an FHA loan, you can qualify for a mortgage even with a 500 credit score. However, your required down payment may be higher.

Can I get a mortgage with no credit?

Yes, it’s possible to get a mortgage with no credit, though it will likely be more difficult. You could consider solutions such as getting a co-signer, going through a more extensive, manual underwriting process or by making a large down payment.

The Bottom Line

Having a low credit score might make buying a house more difficult, but there are many ways to turn your homeownership aspirations into reality.

If your credit isn’t ideal but you’re interested in buying a house, let our friends at Rocket Mortgage^® help you get approved for a mortgage. This way you’ll know how much house you can afford and what credit score you need!