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Buying A House With Bad Credit: A Guide To Your Home Loan Options

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*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

The thought of buying a house can be overwhelming and starting the home buying process with bad credit can make it seem nearly impossible to get a loan.

But did you know:

There’s such a thing as bad credit home loans and that your credit might not be as much of a roadblock as you think.

In this post, we’ll talk about buying a house with bad credit, understanding your credit score, how to qualify for a mortgage, and how to increase your score fast.

What Do Mortgage Lenders Consider A Bad Credit Score?

Most people don’t know this, but there isn’t a specific minimum credit score required by any lender to start looking for a new home.

However, the catch-22 is that a conventional mortgage lender is free to set their own requirements when it comes to your credit score.

And even though government-backed loans give lenders some peace of mind, they still have credit score requirements, even though they are usually much lower.

However, if you have less than a 500 credit score, you might find it a bit hard to get a mortgage and probably need to focus on increasing your score first.

Can You Buy A House With Bad Credit?

When it comes to the actual number, anything less than a 670 FICO®Score is considered “bad” or “subprime,” according to Experian, one of the three main credit bureaus. More specifically, a fair score is 580 – 669 while a poor score is 300 – 579, but the thing about having bad credit is that it won’t be the same as someone else’s bad credit.

No two situations are the same, and outside of your actual score, lenders (like Rocket Mortgage®) will also be looking at things like:

  • How much you have available for a down payment

  • If you have an overall low amount of debt

  • How much income you have

  • If you have any collections

When you have bad credit, cash is going to be your best friend, and the more of it you have to use toward a down payment, the better.

The reason for this is that your credit score might only qualify you for a certain amount of home, and if you can cover the difference with cash, you can still afford the home you want.

The lender you end up with will also play a factor because all lenders will have different requirements.

And while you can get a bad credit mortgage loan, you must be prepared to pay a higher monthly payment due to much higher interest rates.

But don’t forget, if you purchase a home while having bad credit, you can always repair your credit and refinance your mortgage for much better terms.

Get approved to buy a home.

Rocket Mortgage® lets you get to house hunting sooner.

Home Loan Options For Buyers With Bad Credit

The two primary types of mortgage loans are going to be loans backed by the government and conventional loans.

The difference between the two is that a conventional loan isn’t backed by or insured by the federal government, but government-backed loans are.

You will find that a loan backed by the government will have lower requirements for your down payment, your credit, and your debt-to-income ratio.

These loans are also less risky for lenders.

Let’s check out some of the different loan options available and the average credit score requirements for each of them:

Conventional Loans

There isn’t a set number for what your income, credit score, or down payment will need to be for you to qualify for a conventional loan.

However, you will usually need a 620credit score or better to qualify for a conventional loan.

If you have more income or a higher down payment, it might be much easier to qualify for a conventional loan even if you have a score a bit lower than 620.

FHA Loans

An FHA loan is a loan backed by the Federal Housing Administration. If you’re a first-time home buyer or haven’t purchased a home in the last 3 years, you could qualify for this loan.

The minimum credit score needed to get an FHA loan is usually around a 580; however, if you can make a 10% down payment, you can probably get approved with a credit score between 500 - 579. Rocket Mortgagerequires a minimum score of 580.

FHA loans also have additional requirements that must be met for you to qualify for the loan.  For instance, you can only use an FHA loan to purchase a primary residence.

VA Loans

If you’re a veteran or an active-duty member of the armed forces, then you could qualify for a VA Loan.

A VA loan is backed by the Department of Veterans Affairs and allows any qualifying service member and qualified spouses to buy a home with $0 down.

Just like FHA loans, your home has to meet specific standards to qualify. And while there isn’t a specific score you need to qualify for the loan, you will need around a 620 to be eligible for a VA loan through Rocket Mortgage.

USDA Loans

A USDA loan is another loan backed by a government department, the U.S. Department of Agriculture.

A loan from the USDA allows you to buy a home in a qualifying rural area with a $0 down payment. 

However, most lenders will require a 640 credit score to qualify for the loan, along with other income requirements specific to a USDA loan.

Best Home Loan Options For Buyers With Bad Credit In 2020

In 2020, the best home loan options for you if you have bad credit is going to depend on how bad your score actually is.

If you are in the 600 range, there are going to be more options available for you to choose from, but if your score is below 600, you probably should look into an FHA loan.

Of course, the best option will be to work on improving your credit score.

Work On Improving Your Credit Score

While this is usually not the answer people want to read or hear, it’s the most practical and can save you thousands in interest payments and decrease how long it will take to pay off your mortgage.

Not only will you have more mortgage options, but you might be able to get your loan with a lower income requirement and down payment.

Of course, as stated above, if you have a score below 500, you probably won’t be able to do anything except wait until you increase your score.

And if you have a bankruptcy on your credit, you will need to wait at least 2 years before a lender will start considering you for a new mortgage.

You can take the necessary steps to grow your score by understanding the following:

Payment History (35%) – Your payment history is responsible for 35% of your score, this is the main reason why people are continually saying “pay your bills on-time” when it comes to your credit score.

Credit Utilization (30%) – The amount of credit you are currently using is also known as your credit utilization and is responsible for 30% of your score. The more credit you are using, the higher your credit utilization, the lower your score can become. It would help if you looked to keep your total credit usage under 30%.

Age Of Credit History (15%) – This is most often referred to as your Average Age of Accounts, and is one of the few factors you have almost no control over. Your credit history is basically the age of your oldest credit account, new credit accounts, and the average ages of all the accounts on your credit report.  

Credit Mix/Types Of Credit (10%) – When you look at your credit report, you will notice that there are a few different types of credit on your report. Those can be revolving credit (credit cards) or installment loans (car loans or a personal loan). Having a mix of credit is a good thing for your score, and it is responsible for 10% of it.

Amount Of New Credit (10%) – Having an account less than 6 months old is usually considered having new credit. Your score will be impacted whenever you add a new account because it will give you a hard inquiry and also decrease your average age of accounts. Be mindful when applying for new credit.

How To Improve A Bad Credit Score Fast

There are several things you can do to help improve your credit score fast when you are trying to buy a home.

Increase Your Available Credit

It would be best if you increase your available credit when you are looking to improve your score fast.

You can do this by either paying down balances or make a credit limit increase request.

The reason this helps increase your score fast is that you will mostly be decreasing your credit utilization, which is a huge factor in determining your credit score.

And guess what:

Most credit card companies allow you to request as many increases as you like without it causing a hard pull on your credit.

Add New Accounts (In Bulk)

Adding new accounts also means you’ll be increasing available credit and increasing your overall credit mix.

Doing this in bulk is even better because it puts everything in the same time frame. Your inquiries will all fall off on the same day, any new accounts will age together, and you’ll add more available credit to your report.

This also allows you to establish an even stronger payment history on your credit report.

It usually takes less than 30 – 45 days to see the effects of adding bulk, new accounts to your report.

Pay For Deletions

This is one of my favorite ways to increase your credit score fast. One of the worst items you can have on your credit report is a collection.

Collections show lenders that you owe money to someone, and you have not attempted to pay the money back.

But get this:

Even if you pay the collection off, it can still remain on your report as “Paid,” which is always better than having an outstanding collection.

However, the best result which will help your credit even better is to request that the items are deleted from your credit report if you make the payment.

You want to be sure to get it in writing before you make payment.

It will basically be like you never received that collection, and it will increase your credit score fast and give lenders one less reason to decline you.

Stay Away From Hard Credit Inquiries

While getting an insurance quote won’t affect your credit score, applying for any type of new credit will affect your score. Having too many inquiries on your credit is not a good thing because lenders see that as a sign of desperation that you need more credit, plus it also lowers your score. You should always ask a lender if they are doing a “hard pull” or a “soft pull” on your credit to make sure you protect your score.

Summary

Hopefully, you have a better understanding of how to buy a house with bad credit, that there are several options available, and that your specific situation will determine which option is best.

With a loan backed by the government like an FHA loan and pretty strong down payment, you can qualify for a loan even with a 500 credit score (however, Rocket Mortgage™has a minimum of 580).

While getting a loan is possible, this does mean you will probably be dealing with a much higher interest rate and higher mortgage payments.

While you might want to get your home today, it’s reasonably best to take the time to improve your score before you start shopping for a loan so you can gain access to more lenders and lower interest rates.

Get approved to buy a home.

Rocket Mortgage® lets you get to house hunting sooner.

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