How To Buy A House With Bad Credit: A Guide
Have past financial mistakes lowered your credit score? You might think you won’t be able to buy a home with subpar credit, but believe it or not, your bad credit score might not be a roadblock.
We’ll take a closer look at the role your credit score plays in your ability to buy a home. We’ll go over what a credit score is and what it means. Then, we’ll look at a few different loan options and explain how it’s possible to buy a home with bad credit.
Can You Buy A House With Bad Credit?
You'll have every aspect of your finances examined in depth when you buy a home. Underwriters look at everything from your household income to how much debt you have. One of the first things that you can expect your lender to do – with your permission – is to access your credit report and credit score.
Contrary to popular belief, there isn’t a definite minimum credit score required to start shopping for a home. Conventional lenders are free to set their own standards when it comes to credit score requirements. Government-backed loans also have lower credit score requirements.
Lenders will take your full financial situation into consideration. For example, you might be able to get a loan despite your low credit score if you have a larger down payment, low debt or higher income.
Keep in mind that taking the time to raise your score may help you buy a home. Getting a loan with bad credit means that you can expect to pay more in interest. Your lender might also require you to have a larger down payment or to pay off some of your debt before they'll close on your home. Factors like your local housing market and how low your score is should also be taken into consideration.
First, Understand Your Credit Score
Your credit score is a three-digit number that tells lenders how well you pay back debt and how likely you are to repay it in the future.
Your credit score comes from the information on your credit reports. Every month, creditors and lenders submit information about you to the three main credit reporting bureaus: Experian, Equifax and TransUnion®. Creditors are people or companies who extend credit or loans to you. Credit card companies, mortgage lenders, landlords and utility companies are all examples of those who might submit your payment data to credit reporting bureaus.
These bureaus compile your information into your credit reports, which lenders can view with your permission. You’ll have a higher credit score if you have a large number of positive items on your reports. On the other hand, your score will be lower if you have more than a few missed payments or a major financial event (such as bankruptcy) on your reports. Here are some things that can affect your credit score:
Your payment history is the single most important factor in your credit score calculation. Your score will be higher if you have a long history of making credit card and loan payments on time. Conversely, missing payments lowers your score.
Credit utilization refers to the percentage of available credit that you regularly use. You’ll have a low utilization rate if you only put a little bit of money on your credit cards each month and you pay them off in full. On the other hand, you’ll have a high utilization rate if you leave balances on your card from month to month and you often max out your lines of credit. You can raise your credit score by keeping your utilization low.
Length Of Credit History
You’re a more stable, reliable borrower if you have a long history of making on-time payments on your accounts. The longer your current lines of credit stay open, the higher your score will be.
Lenders like to work with borrowers who have successfully managed multiple types of credit in the past. Multiple types of credit, including a mix of loans, credit cards and mortgages, can give your score a boost.
Have you been applying for a lot of credit at once? Your lender could view that as a red flag. Avoid applying for other types of credit until you receive a mortgage approval.
Your credit score plays a major role in determining how lenders see you as a borrower. Don’t know your score? Rocket HQSM can show you your score and help you track your credit. Learn more and get started.
Next, Learn What Your Credit Score Qualifies You For
There are two major types of mortgage loans: conventional loans and government-backed loans. Conventional loans aren’t insured by the federal government, while government-backed loans are.
This means that government-backed loans have a less-strict down payment, credit and other financial requirements because they’re less risky for lenders. Let’s take a look at a few of the loan options that you can take advantage of and the credit score requirements for each.
There are no universal income, credit score or down payment requirements to get a conventional loan. You must have a credit score of at least 620 to qualify for a conventional loan in most cases. When they consider you for a loan, conventional lenders look at many more aspects than just your credit score. A higher down payment or more income may convince a conventional lender to give you a loan if you have a slightly lower credit score.
FHA loans are loans backed by the Federal Housing Administration (FHA). You may qualify for an FHA loan if you’re a first-time home buyer or you haven’t bought a home in the last 3 years. The minimum credit score required to get an FHA loan is 580. Your score can be in the 500-579 range if you can offer at least 10% in a down payment.
Keep in mind that your home will also need to meet a few requirements to qualify for an FHA loan. For example, you need to live in the home within 60 days of closing and you can only use an FHA loan to buy a primary residence.
You may qualify for a VA loan if you’re a veteran or an active-duty member of the armed forces. VA loans are loans backed by the Department of Veterans Affairs and allow qualifying service members to buy a home with $0 down. Like FHA loans, your home needs to meet certain standards in order to get a VA loan.
There’s no universal credit score you need to have to get a VA loan. Individual lenders set their own standards and look at applicants on a per-case basis. That said, you’ll need a score of at least 620 to qualify for a VA loan through Quicken Loans®.
A USDA loan is backed by the U.S. Department of Agriculture and allows you to buy a home in a qualifying rural area with $0 down. Most lenders require you to have a credit score of at least 640 to get a USDA loan. You must also meet specific income requirements to qualify for a USDA loan.
Lastly, Decide Whether To Apply Or Increase Your Credit Score
Now that you know what lenders look for when they view your credit score, it’s time to decide whether you should apply now or wait until you’ve raised your score.
If You Apply For A Mortgage Now…
Do you have a credit score of at least 500? You may be able to get a loan. However, you’ll need to “prove” yourself in other areas to reduce the risk to your lender. With a low credit score, expect to pay higher interest rates and a larger down payment if you want to buy a home. Factor these additional costs into your calculations when you decide how much home you can afford.
If You Take Time To Increase Your Credit Score…
You’ll have more mortgage options if you take the time to improve your credit score. You may be able to buy a home with a lower down payment and income requirements. You might also be able to lock down a lower interest rate, which can save you thousands of dollars over your loan term. A loan term is the number of years it’ll take to pay off your mortgage.
In some instances, you may have no choice but to wait until your score improves before you buy a home. You’ll have a very tough time finding a lender willing to work with you if you have a credit score below 500. A bankruptcy or foreclosure on your credit report could also result in a rejection from most lenders. Luckily, both of these conditions are correctable with time and a solid credit improvement plan.
There is no specific credit score required to buy a home, but there are options that can allow you to buy a home if you have bad credit. Government-backed loans allow you to buy a home with a score as low as 500, depending on your down payment. Keep in mind that a low credit score can cause lenders to charge you more in interest or require a larger down payment upfront. 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.
Know the steps you can take to improve your credit score if you decide that waiting is right for you. Sign up for autopay, keep your credit utilization low and reduce debt to improve your score.
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