How to buy a house with bad credit

Most conventional mortgage lenders require borrowers to have a credit score of 620 — at least. So if yours is below that golden mean, you might understandably assume that getting mortgage approval is mission impossible.

Don’t despair. Even with a subpar score, there could still be options for you. Here’s a quick look at how to buy a house with bad credit.

Can you buy a house with bad credit?

When we say “bad credit,” we’re usually referring to numbers on the lower end of the most widely used scoring model, the FICO score, which range from 300 to 850. Actually, there is no credit score threshold that will definitely disqualify you from getting a mortgage. But the lower your score, the harder it will be to find a lender to approve you for a loan.

For conventional loans — those offered and backed by private lenders — a 620 credit score is typically the minimum for consideration, while government-backed loans can dip down into the 500s (more on that below).

Your credit score impacts not only your loan approval, but also the sort of interest rate you’ll be offered. Many of those enticing, low-low rates trumpeted in mortgage lender advertisements are reserved for those with high-high credit scores — at least 740 or higher.

Keep in mind that your score can vary among the three credit reporting bureaus, Equifax, Experian and TransUnion. Most lenders look at the middle credit score of the three when considering you for a mortgage. In addition to your scores, they’ll look at your credit report data, including:

• Late payments
• Defaults
• Bankruptcies
• Total debt
• Number of hard inquiries
• Total active accounts

Your personal credit score is especially important, but lenders also consider other factors in mortgage decisions, including loan-to-value (LTV) and debt-to-income (DTI) ratios, your income and how much money you plan to put down.

What do mortgage lenders consider a low credit score?

Your credit score isn’t the only thing lenders look at when they consider your loan application, but it is a key risk assessment tool. Here’s a look at FICO score ranges:

Home Loans for Bad Credit

Several types of mortgages are geared for those whose credit scores are less than sterling, falling in the fair or low good range.

Conventional non-conforming loan

Even with bad credit, you might be able to qualify for a conventional loan that’s “non-conforming,” or falls outside of Fannie Mae and Freddie Mac requirements, which include a certain minimum credit score. A non-conforming loan can be an option if you’ve declared bankruptcy or are otherwise credit-challenged.

With this type of loan, you generally need to put 10 percent down.

FHA loan

FHA loans are insured by the Federal Housing Administration (FHA) and allow lenders to accept a credit score as low as 580 with a 3.5 percent down payment, or as low as 500 with a 10 percent down payment. These loans have rates comparable to other mortgage types (often, the interest is slightly lower than those of conventional loans, though the annual percentage rate, or APR, ends up being higher). The drawback here is that you’ll pay mortgage insurance.

VA loan

If you’re a member of the military, a veteran or married to someone who has served in the armed forces, one of your benefits is the VA loan program backed by the U.S. Department of Veterans Affairs. You don’t have to come up with a down payment for this type of loan, and there are no minimum credit score requirements, although lenders do have their own credit standards. Plus, the interest rates on VA loans may be lower than on traditional mortgages.

USDA loan

If you meet certain qualifications — earn less than a certain amount each year and want to buy a property in a certain area — the U.S. Department of Agriculture-backed lending program can help you become a homeowner with subpar credit. While the USDA doesn’t technically have a minimum credit requirement, most USDA borrowers have a score of 640 or more.

These loans have no down payment requirement.

Fannie Mae HomeReady Loan

Borrowers with fair credit may want to consider a HomeReady loan, offered by Fannie Mae, the government-sponsored entity that is a major market-maker in mortgages. HomeReady loans aim to make homeownership more affordable for low-income individuals and families. Lenders may accept a credit score as low as 620; borrowers also benefit from other perks like a low down payment requirement of just 3 percent.

Freddie Mac Home Possible Loan

Freddie Mac Home Possible loans may be another good option for fair-credit borrowers. Though these loans require a credit score of 660 for new home purchases — a bit higher than Fannie Mae’s HomeReady loan — the down payment is again only 3 percent.

How to get a mortgage with a low credit score

While getting a mortgage for a home or refinancing with less-than-perfect credit can cost more, it might still be more appealing than continuing to pay rent. Here are tips to help as you figure out how to get a mortgage with bad credit:

1. Shop around

Every mortgage lender is different, and some are able to offer lower rates than others. Research shows that getting multiple rate quotes can save you thousands over a 30-year mortgage.

2. Think beyond banks

Also, remember as you’re comparing options that banks are not the only mortgage game in town. There are non-bank and online-only lenders, credit unions and other types of mortgage companies, and they all want your business. Let them compete for it to see where you get the best offer.

3. Explore bad credit home loans

If you’re a first-time homebuyer or otherwise qualify for low-income loan programs, you also have options beyond a conventional loan. VA loans and USDA loans have no down payment requirement and no set credit score requirement, so ask your lender whether you’re eligible. The Fannie Mae HomeReady and Freddie Mac HomeOne and Home Possible loan programs are worth exploring, too, along with many first-time homebuyer programs.

4. Find a co-signer

If you have bad credit, you might consider asking a family member or friend with better credit to co-sign your mortgage. This can help give your application a boost — but only if the co-signer is able and willing to take on the debt.

How much will a low credit score cost you?

Mortgage lenders check your credit score when deciding whether to approve your loan application. So can you buy a house with bad credit? Yes. But it will shape your process.

Your credit score doesn’t just impact whether you’re approved — it also plays a major role in the interest rate you receive. The best mortgage rates are reserved for the borrowers who present the lowest risk.

The examples below are based on national averages for a 30-year fixed loan in the amount of $326,880 — 80 percent of the national median existing-home price as of May 2023, according to the National Association of Realtors, reflecting a 20 percent down payment.

Tips to increase your chances of mortgage approval

Check your credit report for errors

If you’re wondering how to get a home loan with bad credit, you should first make sure your credit’s actually bad. Obtain your free credit reports from AnnualCreditReport.com and review them carefully. More than one-third of participants in recent Consumer Reports research found errors on their reports, and these mistakes can be costly. There are many issues that can drag down your credit score, such as an incorrect open loan attached to your name or an incorrectly-filed late payment.

If you see a mistake or outdated item — generally seven years, but sometimes longer for bankruptcies, liens and judgments — contact Equifax, Experian or TransUnion. Each of the credit bureaus has a process for correcting errors and out-of-date information.

Create a budget — and stick to it

To improve your credit standing, you’ll need to avoid racking up debt, so it’s important to get a realistic sense of what you’re spending. Create a budget that tracks income and expenses, and look for opportunities for small savings that could add up.

Make all payments on-time and in full

This is the gold-standard practice for good credit. Develop the habit of making bill payments on time so you avoid late fees and other needless costs, as well as blemishes on your credit report.

Save for a larger down payment

You’ll need ready money for a down payment and closing costs, and you’ll need to show the lender that you won’t be draining your financial accounts to zero in order to purchase a home.

The more you save up for your down payment, the more you’ll be able to lower your interest rate. In fact, a big enough down payment might even help you avoid mortgage insurance. You can begin by setting aside cash every week or pay period.

See if you qualify for help

There are more than 2,500 down payment assistance programs nationwide, so there could be one you qualify for. If you’re a first-time homebuyer, be sure to search, as many states earmark aid for novices (by the way, you can be considered a first-timer if haven’t owned a home in at least three years).

Pay down debt

When you’re working toward buying a home with bad credit, prioritize paying off what you already owe. As we mentioned earlier, one of the metrics mortgage lenders look at is your debt-to-income ratio. So minimizing the amount you owe can go a long way. Plus, paying down your debt will impact your credit-utilization ratio, the measure of how much credit you have used relative to your total credit availability, which impacts your credit score.

As you pay down debt, don’t close any credit cards. Leave them open, even with a $0 balance and no plan to use them in the future. When you close a card, your available credit drops, which reduces your borrowing power. More importantly, that available balance factors into your credit-utilization ratio. And closing a card will reduce the overall age of your credit, another factor in your credit score.

Also: no new debts! Don’t make other major purchases (unless you can pay in cash), take out other loans, or apply for new credit cards while you’re applying for a mortgage. These moves can push down your credit score.

Consider a rapid rescore

Credit report changes can take time to go through the system, so improved scores might not show up in time for a mortgage application. In this case, you might want to get a so-called rapid rescore through your lender.

A rapid rescore allows a lender to submit proof to a credit agency that an applicant has made recent changes or updates to their account that are not yet reflected on their credit report, according to Experian. Borrowers cannot request their own rapid rescore, as the service is only offered to lenders. You’ll need to pay for a rapid rescore, but the expense might be worthwhile, since the lower interest rate you’ll receive could more than compensate for the fee for adjusting your credit.

Bottom line for borrowers with bad credit

It is possible to buy a house with bad credit. Explore different mortgage options and work on getting your finances in order as much as possible.

Even a small increase in your credit score can make a big difference in your mortgage interest rate. For example, even if you only raise your credit score to 665 or so from 650, you might be able to cut your mortgage costs significantly. Over the course of a 30-year mortgage, for instance, your monthly payment will be lower, and you would save more than $44,000, based on our FICO score/APR/monthly payment chart above.

Additional reporting by Jess Ullrich