The lowest credit score to buy a house: How bad credit affects loan options

Just because you’ve had a few dings on your credit in the past doesn’t mean they have to permanently affect your financial future. If you believe you have bad credit, you can still look forward to buying a home if you make the right moves. We’ll go over the lowest credit score to buy a house, but we’ll also give you the tools and resources you can use to qualify for better terms.

Key takeaways:

• Bad credit is subjective, but FICO^® Scores between 300 – 579 are considered subprime and have less favorable terms, including higher interest rates and down payments.
• FHA and VA loans have more flexible credit requirements if you have past credit issues.
• Good credit habits, such as paying on time and checking for errors, can ultimately help boost your credit score.

What do mortgage lenders consider a bad credit score?

“Bad” is a subjective judgment. Lenders deal in hard numbers, so it’s not a matter of “good” or “bad.” It’s whether you hit a minimum number. Any ranges defining your credit score are guidelines and not hard and fast rules. But to get a basic idea of where you stand, here are some general standards, according to FICO^®.

Can you buy a house with bad credit?

There is no such thing as a mortgage loan for bad credit. If a lender thinks you can make your house payment, you must have decent credit. Lenders aren’t in the business of taking bad risks. But you can certainly buy a home without a perfect credit record. Because credit score isn’t all that lenders use in qualifying you for a home loan, there may be mitigating factors if your credit score is less than stellar.

Along with your credit score, lenders are going to look at your down payment. The less you borrow, the less risky the loan. They’ll also take a look at your debt-to-income ratio to get an idea of how much you can afford for a home, along with your existing debt payments. If they see that you have plenty of savings, it’s a sign that you would be able to handle the payment for a while if you lost your income.

Home loan options

Your credit score doesn’t have to be perfect to qualify for a home loan. Some mortgages are more attainable for those who have had credit issues in the past.

To put borrowers in the most advantageous loan available, Rocket Mortgage doesn't offer subprime loans. A credit score below 580 would classify the loan as subprime, burdening the borrower with higher interest rates. Instead, we provide you with the tools to strengthen your credit and help you qualify for a more favorable loan in the future. 

FHA loans

Federal Housing Administration loans are attractive to first-time home buyers and others based on looser qualifying requirements and a 3.5% minimum down payment.

FHA loans have a minimum credit score of 500, but you need a 10% down payment. Further, few lenders offer loans for borrowers with this credit score. The minimum at Rocket Mortgage is 580. It should be noted that if you have a credit score of 620 or higher, you can qualify with a higher DTI ratio in many cases, although never higher than 57%.

If your score is between 580 – 619, your housing expense ratio – the percentage of your income going toward your mortgage payment – should be no higher than 38%. Your total DTI ratio should be no greater than 45%.

There are other requirements. FHA loans come with lifetime mortgage insurance if you make a down payment of less than 10%. They can also only be used to purchase a primary residence.

VA loans

Veterans Affairs loans are a 0% down payment option for those who have served our country. Active-duty military personnel, reservists, and National Guard personnel are required to meet minimum service requirements. Exemptions exist if you receive VA disability or you’re a qualified surviving spouse. While the VA has no minimum credit score requirement, Rocket Mortgage requires a minimum credit score of 580.

VA loans are limited to buying a primary residence. Furthermore, there’s a VA funding fee intended to keep the program solvent that you have to pay in most cases. The exceptions are if you receive VA disability, are a qualified surviving spouse, or have returned to active duty after receiving a Purple Heart.

Conventional loans

Conventional loans are privately backed loans not made by the government. By far, the most common conventional loans are conforming loans. These generally have a minimum credit score requirement of 620 or higher, but there are some advantages to consider.

Conventional loans have a down payment minimum of 3% if you meet certain income limits or are a first-time home buyer. Additionally, unlike FHA loans, private mortgage insurance can generally be taken off by request once you reach 20% equity. Finally, although it will require a higher down payment, conventional loans can be used for vacation homes and investment properties.

USDA loans

If you plan to live in a qualifying rural area, a USDA loan may be another good mortgage option. This is a 0% down option aimed at rural areas. In addition to the location requirement, you and every member of your household can’t make more than 115% of the area median income.

Rocket Mortgage doesn’t offer USDA loans, but we’re happy to explain all your mortgage options.

Hard money loans

If you don’t want to wait to get your finances in order, a hard money loan may be an option, but it comes with significant downsides. Lender requirements may vary, but generally, there are very few qualification requirements for a hard money loan. The lender is banking on the fact that they can take the property back if you don’t make the payments.

While your home is collateral for any mortgage, hard money loans often come with very high interest rates because the lender isn’t qualifying you to the same level they would if you get a traditional mortgage. This makes it even harder to afford the mortgage in the long term.

Rocket Mortgage doesn’t offer hard money loans.

6 options for buyers who aren’t quite ready yet

If you can’t qualify for a mortgage yet, or perhaps you want a chance at better terms, there are things you can do to repair your credit.

1. Check for errors

There are three major credit bureaus: Equifax^®, Experian™ and TransUnion^®. Each has its own scoring formula. You can’t challenge their scores, but you can review your report for errors. Only things you’ve actually done should be held against you. You can request that any mistakes are deleted.

AnnualCreditReport.com lets you access once a week your credit report from each of the three major bureaus. It doesn’t show your credit score, but it does give you visibility into what’s going on. Rocket Money℠ updates your FICO^® Score 2 once a month based on Experian™ data.

2. Pay on time

Paying on time is the single biggest thing you can do to help your credit score because 35% of the formula is based on payment history. If nothing else, always make at least the minimum payment for every bill you have. Set your accounts on auto pay if it helps.

3. Increase your available credit

Increasing your available credit can boost your credit score by lowering your credit utilization ratio. Credit utilization is the amount of your revolving balances compared with your credit card limits. You generally want to keep this at or below 30% of your overall limit.

There are several ways to approach this. You can pay down existing debt or request a loan limit increase from your credit card company. They’re more likely to grant this if you’ve gotten into the habit of paying on time. Amounts owed make up 30% of the overall formula. This includes installment debt as well, but we often focus on credit cards because that’s the discretionary spending that changes monthly.

4. Pay for deletions

If you have past collections on your credit report, it’s considered an adverse event and can stay on your report for up to 7 years. If you eventually get the money and pay these off, they show up as “paid” on your credit report, and it’s not as bad for your score. However, it would be best if the collection didn’t show up at all.

If you have the funds to pay off your collection, you should ask your creditor if they’ll delete the record in exchange for your payment. They won’t always do it, but it can’t hurt to ask.

5. Stay away from hard credit inquiries

Applying for too much new credit at once is a sign to potential lenders that you may be overextending yourself. Credit inquiries make up 10% of your credit score. When you apply for new credit, your credit score typically drops slightly with each inquiry. The good news is shopping around for the best rate on something like a mortgage only counts as one inquiry if you check with every lender within a 2-week window.

6. Find a co-signer

If you’re able to find a co-signer, their income and assets can be considered in addition to yours. The boost in income can help lower your DTI ratio and allow you to afford more when you’re looking for a home. Your co-signer needs to understand that they’re responsible if you can’t make the payments, so having the conversation together will avoid potential misunderstandings in the future.

Median credit score

One benefit of having a co-signer is that it generally helps you qualify based on your credit score. When you’re applying for a home loan yourself, the median score between all three bureaus is the one that counts. That’s the middle score of the three. When you’re applying with a co-signer or co-borrower, it’s the lowest median score between the two borrowers that typically counts.

The one exception to this is that certain loans backed by the conventional mortgage investor Fannie Mae use a different method when there are two clients on the loan. Fannie Mae takes the average of the median scores of the two borrowers, so if one client has a much higher median score, that could make the difference in qualification.

Fannie Mae only uses the average median method to determine whether you qualify for the loan. To determine the interest rate and mortgage insurance payment, this is still based upon the lowest median score.

FAQ

Now that we’ve covered the basics, let’s try to anticipate some of the questions that might be rolling around in your head.

What is considered a bad credit score?

While bad is a subjective label, it’s fair to say that scores from 300 – 579 involve subprime lending. Any loans you could get with this credit score are likely to come with higher down payments and elevated interest rates.

Can I get a mortgage loan with a credit score of 500?

VA and USDA loans technically have no minimum credit score requirement, so you might find a lender willing to try to qualify you for these loans. You can obtain an FHA loan with a credit score as low as 500 and a 10% down payment.

However, many lenders, including Rocket Mortgage, won’t offer a loan below a 580 credit score because the rates and terms would be onerous for the client. You wind up with subprime rates. We would rather set you up for success by getting your credit score to a point where you can see more favorable terms.

Will I pay more for mortgage insurance with bad credit?

FHA loans have standardized mortgage insurance fees regardless of your credit score. The same applies to the VA funding fee. However, credit is one factor that determines the cost of private mortgage insurance in conventional loans, along with the way you pay for your PMI and the size of your down payment.

Will getting a co-signer help me get approved for a mortgage?

Finding a co-signer could help you demonstrate a lower debt-to-income ratio (DTI) and more assets for a down payment or reserves. In many cases, it won’t help you with a lower credit score because the lowest median score of all borrowers on the loan is the one that counts. Fannie Mae does have some options where they look at the average of the median scores.

The bottom line: Getting a home loan with bad credit is possible

A bad credit score doesn’t have to stay that way. You can always strive for a score that will secure favorable terms on your mortgage loan. Start with good habits, such as regularly checking your report for errors and paying on time. Co-signers can also help. There are even options available for individuals with lower credit scores; however, we recommend a credit score of at least 580 to avoid the unfavorable terms associated with subprime lending.

If you’re feeling more confident and ready to get started, you can apply online. If you just want to talk to someone about the next steps, you can also chat with one of our Home Loan Experts.