How to buy a house with bad credit

You might assume getting approved for a mortgage to buy a house is impossible if you have poor or bad credit. However, 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.

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. Many lenders use the FICO score, which ranges from 300-850. You need a credit score of at least 580 to be in the “fair” credit category. Good credit is typically understood to be any score between 670 and 739.

Can you buy a house with bad credit?

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 conforming loans, a 620 credit score is typically the minimum for consideration, while government-backed loans tend to offer more flexibility for a mortgage with a low credit score (more on that below). If you’re looking at the many mortgage lender advertisements for the best interest rates, however, assume a credit score of at least 740 or higher.

Credit scores generally range from 300 to 850, though some scoring models for auto loans and bank credit cards can stretch from 250 to 900. One of the most common scoring models is the FICO score.

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. They consider other factors, as well — including loan-to-value (LTV) and debt-to-income(DTI) ratios, your income and how much money you plan to put down — but credit scores are especially important.

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:

• 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.
• Think bigger than banks – Banks are not the only mortgage game in town. There are non-bank and online lenders, credit unions and other types of lenders, and they all want your business. Let them compete for it to see where you get the best offer.
• Explore bad credit home loans – If you’re a first-time homebuyer or otherwise qualify for low-income loan programs, you 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.
• 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.
• See if you qualify for down payment assistance – If you’re looking to get a mortgage with bad credit, you might be worried about coming up with a down payment or hoping to boost your down payment to compensate for your credit situation. There are more than 2,500 down payment assistance programs nationwide, so there could be one you qualify for.
• Don’t make any big changes to your finances – A new credit card or big purchase can push down your credit score, so avoid taking on or applying for new debt during the mortgage application process.
• Watch out for ‘guaranteed’ approval loans – If you see ads promising “guaranteed” approval for a mortgage regardless of credit, it’s a red flag. Under federal rules, a lender must verify the ability of a borrower to repay a mortgage, so there can’t be a “guarantee” unless that happens. On these kinds of offers, you might even get that guaranteed approval, but it’ll come with excessive or inflated costs.

Mortgage loans with low credit score requirements

As you explore buying a home with bad credit, you have several loan options:

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 for factors like credit score. This 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. 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 don’t come with a down payment requirement.

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 $287,200 — 80 percent of the national median existing-home price as of January 2023, according to the National Association of Realtors, reflecting a 20 percent down payment.

There is a dramatic difference between a 6.732 percent APR and an 8.321 percent APR — more than $100,000 — in interest over the life of the loan. Although this example doesn’t go below 620, the data is clear: Credit scores lower than that result in even higher financing costs — or missing out on homeownership altogether.

How to increase your chances of mortgage approval

To increase your odds of being approved for a mortgage before you even start filling out the loan application, work on improving your credit well in advance of house-hunting or seeking a mortgage preapproval.

1. 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.

2. 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.

3. 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.

4. Save for a larger down payment

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

Get in the habit of saving money now. 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.

5. 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.

6. Take advantage of credit-boosting programs

To improve your credit score, you can explore booster programs such as UltraFICO and  Experian Boost, which track the movement of cash in your bank account. It can also be a good idea to utilize credit monitoring services. Many banks offer these services, which will help you to get a sense of when and why your score goes up or down.

7. 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

You can figure out how 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 $30,000, based on the above example from myFICO.