How to Buy a House With Bad Credit

It’s the classic, age-old American Dream: The white picket fence accompanied by the freshly mowed lawn in suburbia. But for some of us, this perfectly painted picture of homeownership can feel very dreamlike. 🏘️

This is especially the case if you’re like 34% of Americans who have fair or poor credit. If you are a credit-challenged consumer, the exhausting process of buying a home can be more nightmarish than dreamlike.

But, the reality of it all is that while buying a house with a bad credit score is a challenge, it’s not a challenge you can’t overcome. More and more people are overcoming the difficulties and uncovering the secrets of homeownership. After all, the housing demand has seen an explosive increase during the COVID-19 pandemic.

If you have bad credit but want that white picket fence, or maybe even just any place to call your own, this one’s for you.

What you’ll learn

• Credit Score Required to Buy a House
• What You Need to Buy a House
• Getting a Mortgage with Poor Credit
• Home Buying Tips
• Improve Your Credit Before Buying
• Buying a House During COVID-19
• Conclusion
• Bad Credit Home Buying FAQs

What Credit Score is Needed to Buy a House?

One size truly doesn’t fit all. This is especially true with our individual financial situations. That said, there’s no one credit score that is needed to buy a house. This is because there’s a slew of different mortgage loans that cater to the different levels of credit and the different needs of the prospective borrower. 

A better score qualifies you for better rates and broader loan options, while poor credit does the opposite. Here’s what you need to know about loan qualifications and credit ranges.

Scores Ranging Between 500 to 579 

If you find yourself in this credit range, don’t get too down in the dumps. While it may seem impossible, you actually can qualify for a mortgage loan with a credit score in the low to mid 500s. There’s a catch though—lenders will expect you to put down a larger down payment and the loan will more than likely have to be a loan backed by federal programs. 🏛️

FHA loans are the most common and primary type of mortgage loans for this credit range. And quite frankly, your only shot. These types of loans, backed by the Federal Housing Administration, provide insurance to the lender in case of default by the borrower. Because of the low risk to the lender, these loans are very accessible and offered by a wide variety of lenders.

With a score in this range, the lender will require you to put down a 10% down payment. It’s also important to know that based on the county you live in, FHA loan borrowing limits may vary drastically.

Your lender may also ask you to make good on some of your existing collections or judgments before closing. This is in addition to coughing up more cash for a down payment and meeting all of the requirements, of course. Plus, your interest rate will be relatively high compared to your fairish or goodish credit neighbor. 

Scores Ranging Between 580 to 619

If you ask most lenders what the bare minimum credit score requirement is, a score of 580 is likely what they’ll tell you. Having a credit score in this range opens a few more doors for bad credit mortgage loans than having a score of 579 or lower. 

You can qualify for an FHA loan, which are the same type of government-backed loan mentioned in the previous credit category. The key difference is that with a score of at least 580 you are required to put down a much lower initial down payment of 3.5%. So, if you can increase your credit score up to this range, you won’t have to save as much to buy a home.

Additionally, if you are a veteran or a spouse of a veteran, you may be eligible for a VA loan, a mortgage provided by the Department of Veterans Affairs. VA loans have many perks, and the minimum credit requirement is just one. Other great perks include the no need for a down payment and that Private Mortgage Insurance (PMI) is waived for all borrowers. A sweet deal for those who have served, honestly. 🇺🇸

Scores Ranging Between 620 to 699 

If you’re at this “fair” to “good” credit level, congratulations! Buying a home is going to be easier with good credit. In this tier, it’s possible you can qualify for a conventional mortgage that isn’t backed by a federal agency like The VA or FHA. The down payment requirements are also lenient, typically requiring 3%.

If you hit that 620 benchmark, there are also other affordable government housing loans outside of the FHA that you may qualify for. These programs include Fannie Mae and Freddie Mac.

Scores 700+ 

Got a 700+ credit score? If so then the world is your oyster when it comes to shopping for mortgages. Providing you have everything else you need, you are very likely to qualify for the majority of top mortgage loans and with a pretty decent interest rate too. 👍

Massive bonus points for you if your credit score is 740 or higher because you’ll get to take advantage of the best interest rates possible. A low interest rate can save you thousands over the life of your mortgage. Interest rates are at an all-time record low in the face of the pandemic and having top-tier credit allows you to take the utmost advantage of these stellar rates. 

What You Need to Buy a House 🏡

While your credit score is a lead role in the play of buying a house, your score alone isn’t the sole star of the show. Even if your score is holding you back, there are ways you can fix your credit to buy a house.

There are other factors included in determining your home loan eligibility. If you have these factors in check, it increases your shot of obtaining a mortgage loan.

Home Buying factors outside of credit include:

• How much money you can put down
• Your total existing debts
• Your income and its reliability/stability

Down Payment 💰

They say cash is king. This is especially true when you have bad credit. The more money you can put down, in general, the better off you will be on your house buying adventure.

The standard required down payment for fair-good credit qualified mortgage loans ranges between 3 – 5%. This of course depends on the lender and loan type. But, unfortunately for our poor credit friends, sometimes the minimum down payment requirement can be all the way up to 10%. 

It’s also possible that your credit score might only qualify you for a specific loan amount—this could cause you to fall short of borrowing funds to cover the price tag on that dream home you are eyeing. But, if this happens, you can use your cash savings to make up the difference and still get the home you desire.

The more cash you can inject also means you have higher equity right out of the gate. With how fast the prices of homes are rising these days all across the country, the equity in your home will only keep rising if you buy at the right time.

Another advantage of having a large down payment is that you can dodge the pesky Private Mortgage Insurance. This special type of insurance is a requirement for borrowers of most mortgage loans who put less than 20% down on their homes. PMI, as the name suggests, is insurance on your mortgage loan to protect the lender in case you were ever to default. 

Oh, and did we mention it’s expensive? PMI ranges from 0.55% to 2.25% to the total cost of the loan, annually. So If you can manage to save 20% to put down on your home (and yes, we know that’s a big number), you can dodge the PMI bullet.

Good Debt to Income Ratio 💳

Your debt-to-income ratio, or DTI, is another key factor in the equation of buying a house. Sometimes referred to as credit utilization, this ratio is self-explanatory by its name: it’s the ratio of debt you have in comparison to your income. 

DTI helps lenders assess how comfortable within your budget your mortgage payment will be. The lower DTI you have, the less likely a mortgage is to stress you out financially…or worse, put you into a position of default.

To calculate your DTI, it’s simple really. You first add up the minimum payments of all of your monthly debts including credit cards and loans. Make sure to not include other expenses like utilities, groceries, and savings. 

Next, you will add the total estimated payment of your desired future home. The total payment includes principal and interest and other situational factors like PMI, taxes, and insurance (if escrowed.) You then divide that number by your total gross (pre-tax) income. The percentage you get is your ratio.

There is no one universally agreed-upon number, but most lenders prefer a DTI that is at or below 36%. Some lenders will extend this number up to 50% and others will suggest a lower, more “ideal” ratio of 25% or less

Stable Income 💲

The last factor you need to buy a house is proof of a stable and reliable income. If your other factors aren’t checking the boxes, lenders are less likely to lend to you if you can’t provide the evidence you earn a consistent income. If you change jobs often or have had long spurts of unemployment, the odds might not be in your favor. 

However, the odds may be in your favor if you can show stability and consistency. If you’ve worked for the same company for the past several years, or have proof of steady self-employment income, you will meet the requirements.

Lenders typically want your most recent tax returns, pay stubs, bank statements, or personal financial statements that map out your income sources. Also note that lenders have the right to verify your employment by contacting your employer, so never lie!

How to Get a Mortgage With Poor Credit 💡

We’ve dissected the major factors: credit, income, debt ratio, and the amount of your down payment. But, to qualify for a mortgage loan with bad credit, there are some additional things you need to know. Here are other ways you can get a mortgage with bad credit.

• Shop around and explore your options. If you can take the time to look at different rates offered by different lenders, you have the potential to save thousands. To begin shopping, you can call local lenders around you or use the mighty information highway to search for your best options. We’ve got our picks for the best lenders for bad credit to help you out.

• Look for situation-specific loans. We all have a different story—and those who provide mortgage loans know this. While you are shopping, consider looking for loans that you could benefit from based on your status. First time home buyer? Try FHA or a state-funded first time home buyer program. A Veteran? Look into a VA loan. 

• Considering getting a cosigner. If your credit and income alone aren’t going to qualify you, it’s time to consider looking into a cosigner. A cosigner helps your approval by adding their credit and income to the equation. 

Co-signers are a joint borrower, who agrees to take equal responsibility for the loan upon signing those stacks and stacks of papers. If you miss a payment, it has consequences for your co-signer too. So, It’s important to understand that this is a big favor to ask with potentially relationship-damaging consequences.

• Don’t be afraid to seek assistance. You may need help coming up with the down payment, and that’s okay. Especially if you are a first-time buyer, different states have different programs to assist with this. This down payment assistance is usually in the form of a smaller additional fixed-rate loan.

• Put more money down. Yes, it’s not impossible to have poor credit and have a surplus of cash savings. If you are one of those people, considering forking over more money to put down on your home. The more you can put down also lowers your monthly payment, which is huge considering with a bad credit score you’ll likely be facing a high interest rate. 

• Do NOT make any rash credit-affecting decisions. We say this firmly. Do not open up a new account or accrue any new debt in the form of large purchases while you are in the process of buying a house. Acquiring new debt can seriously plunge your score, hurting your chances of getting a mortgage. Wait until your mortgage loan closes and you are all set before taking on any new accounts.

Other Tips for Home Buying With Bad Credit

Slowly getting all of your ducks in a row? Pat yourself on the back. 👍 To be even more prepared for the woes of home buying, here are some additional tips.

• Know your credit score. First and foremost, it’s important to understand your creditworthiness and where your score fits on the scale. To start, you’ll want to obtain your credit report. Right now, due to the pandemic, you can obtain your weekly credit report for free.

• Look over your credit report for errors.  After you’ve obtained it, you’ll need to know how to read your credit report, and check it for reporting mistakes. If you find an error, it may be worth disputing it with the credit bureaus. This could possibly result in a change in your credit score too, so study up! 

• Create a budget. Consider creating a strict budget and sticking to it. Also, think about cutting out fast food and eating out, and cut out those extra subscriptions you don’t use.
  
  Avoid frivolous and unnecessary spending—living within your means and at the bare minimum is the quickest route towards buying that house without busting the bank. The more you can save, the more you can put down.

• Compromise on a higher interest rate. If you want into that house ASAP, you may have to suck it up and settle for the higher interest rate. It’s the unfortunate way of the world, but lenders tend to charge more interest for poor credit folk as a way to protect themselves from loss.
  
  The downside is a higher interest rate usually equates to a higher mortgage payment. However, know that interest rates are not permanent—you can always refinance your house in the future once you’ve improved your credit.

Improve Your Credit Before Buying 📈

Brace yourself, we’re about to hit you with the cold hard truth. Your credit just might be too bad to qualify you for a mortgage—at all. But, if you fall into that group of people, don’t beat yourself up. Just because you can’t get a mortgage today does not mean you can’t ever feel the sweet, sweet feelings of homeownership.

A mortgage loan is a big commitment and for most people is the largest purchase you’ll ever make in your life. It’s also important to know that it is not always wise to rush right into it, especially if you have very poor credit. 

And if you do qualify, that doesn’t necessarily mean you should take what you can get. The consequences of that action can include higher interest rates and the expectation to front a larger initial cash investment.

If you find yourself in a situation where your credit is just a little too bad to get a mortgage then it’s time to focus on building your credit. There are five major credit factors that go into the calculation of your credit score: payment history, credit utilization, age of credit, hard inquiries, and variety of credit. 

To repair your damaged credit you can:

• Focus on paying all of your monthly bills on time to build a better payment history. 
• Pay down the excessive debt that is raising your credit utilization. The lower your utilization of your credit, the better.
• Avoid applying for new credit if you already have a substantial number of accounts.
• Attempt to get derogatory or other negative items removed from your credit report.
• Play the waiting game. Your credit gets better with age as lenders like to see a stable history. Plus, late payments, collections and other types of negative items are going to fall off after seven years.

Feeling overwhelmed with the credit building process? That’s completely understandable. You also have the option of seeking professional help or expert local credit repair agencies. They are the experts after all, and no one can guide you on your credit repair journey better than them.

Buying a House During the COVID-19 Pandemic 😷

When disaster strikes, we have a natural tendency to enter panic mode and to put important things on the back burner. Buying a home is a big purchase and long-term commitment, so it’s obvious that it’s one of those things we may want to put off. 

The COVID-19 pandemic is one of those life-deferring disasters that has outlasted most of our expectations. It’s been evident that the annoying virus that changed the world seemingly overnight is not going away. 🦠

Therefore, it’s okay to want to move on with your life and achieve your financial goals. If buying a house is one of those financial goals, know that the pandemic has not completely erased the possibility of homeownership.

The housing market is booming and will continue in 2021 with an expected 7% increase in sales and a 5.7% rise in prices according to Forbes. On top of that, economic factors impact interest rates, and these rates have hit a new low. That’s why bad credit home buyers have it pretty good at the moment—even the highest of the new low rates is still pretty low.

On the flip side, several states have seen steady price increases to offset the low interest rates. This is essentially a balance meaning you may pay more money for your home in exchange for a lower rate. Either way, your home is an investment and time has proven that your investment will only grow.

If you are in a comfortable spot and have been fortunate enough to not see major financial challenges as a result of the pandemic, now may be your time to buy. Assess your local market, contact a few different agents, and start researching. If one good thing can come out of COVID it’s the purchase of your home. 🏠 

The Bottom Line 🏁

Having bad credit isn’t the abrupt end to your dreams of buying a home. There are various types of loans and lenders out there geared to help the bad-credit consumer achieve their goals of owning a home. It’s important to know your options are for your credit level and to do your research. 

Make sure you save enough cash for a downpayment. The more the merrier as this will help your approval odds tremendously. Focus on your total over debts and your income levels as these factors go hand in hand with your credit score. 

Always know your credit score and make time to monitor your report. If your credit is too big of a roadblock to buying a house, focus on repairing it. Either way, never be quick to make decisions when it comes to obtaining a debt as large as a mortgage. You will get there in no time with some patience and effort. 💯

About the author

Summer Nevins

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Summer is a banking professional and business school graduate turned expert finance writer. Raised in a small low-income town in the southern United States, Summer, like a lot of millennials, learned the ropes of personal finance the hard way. Both her work and life experiences led to discover her true passion for educating others about the complicated field of finance. Summer currently resides in the Greater Nashville Tennessee area with her husband. When she’s not writing, Summer enjoys exploring the beautiful world and hiking all of the challenging trails along the way.