How to buy a house with bad credit

On a positive note, you don’t need a perfect credit score to buy a house. There are bad credit home loans available for borrowers who struggle with credit imperfections or those who have no established credit. We’ll break down the details you need to know if you’re thinking about trying to buy a house with bad credit. 

What do mortgage lenders consider a bad credit score? 

To qualify for a mortgage, you need a minimum FICO Score that’s high enough to satisfy the lender’s qualifying criteria. Minimum credit score requirements can vary depending on the loan program and they may differ from lender to lender as well. 

For example, you typically need a FICO Score of 620 or higher to be eligible for a conventional mortgage. But you might be able to qualify for an FHA loan with a FICO Score as low as 500 with certain lenders (if you can put up at least a 10% down payment). 

Lenders may consider any FICO Score below 670 to be a subprime credit score when evaluating mortgage applications, according to the credit bureau Experian. 

Speaking generally, a FICO Score of 670 or higher is considered a good credit score. Meanwhile, scores between 580 to 669 are considered fair credit scores and scores of 579 and below are classified as poor credit. If you have a FICO Score below 500, you may struggle to qualify for any mortgage loan until you improve your credit. 

Which credit scores matter for mortgage applications?

You should understand that the scoring models typically used by mortgage lenders differ from the scores you commonly see elsewhere (for example for free on your credit account) even if you’re looking at a FICO Score. For example, if you’re a Discover customer, you have access to your FICO Score 8 for free. But the scores mortgage lenders generally rely on are as follows:

• FICO Score 2—Experian/Fair Isaac Risk Model v2
• FICO Score 5—Equifax Beacon 5
• FICO Score 4—TransUnion FICO Risk Score 04

If you want those exact scores, you’ll likely need to purchase access through myFICO.com. Still, looking at a different FICO Score model such as the FICO Score 8—which is also available for free via Experian’s website—can give you a general idea as to the state of your credit.

Bad credit home loans

If you’re interested in the possibility of buying a house with bad credit, connect with a reputable mortgage lender and ask them about loan programs that don’t require good credit to qualify. Seeking out a housing counseling agency certified by the U.S. Department of Housing and Urban Development (HUD) may also help set you up for success as you figure out what bank or credit union might be the right lender for you and what mortgage type could be a good fit.

You can find a HUD-approved counseling agency via the Consumer Financial Protection Bureau’s Find a Counselor tool, by calling the CFPB at 855-411-2372, or by calling the HOPE Hotline at 888-995-4673 (open 24/7). 

Below are a few types of bad credit home loans you may want to research, along with the basic requirements you’ll need to satisfy. The following are government-backed loans, meaning the federal government insures them and reduces the risk for lenders in case the borrower defaults. This helps lenders offer mortgages to borrowers who might otherwise struggle to qualify.  

FHA home loans

The Federal Housing Administration insures FHA loans so lenders can make homeownership more accessible to potential homebuyers. Most lenders require borrowers to have a FICO Score of 580 or higher and a minimum 3.5% down payment for this type of mortgage. But some lenders may accept a FICO Score as low as 500 if you provide a 10% down payment. 

VA home loans

You don’t need a specific credit score to qualify for a VA loan. But many lenders require a minimum FICO Score of at least 580 for this type of loan. Some lenders may only work with borrowers who have a FICO Score of 620 or higher. The Department of Veterans Affairs backs these loans for eligible active-duty service members, qualified veterans, and surviving spouses. 

VA loans feature no down payment requirement, no private mortgage insurance requirement, and limited closing costs. However, these loans do usually feature a funding fee.

USDA home loans

The U.S. Department of Agriculture backs USDA loans and doesn’t impose a minimum credit score requirement. Yet lenders that offer these loans set their own approval criteria and often require borrowers to have FICO Scores of 620 or higher to qualify for financing. 

Another perk of USDA loans is that there’s no down payment requirement. But you do need to purchase a home in an eligible rural area—and there may be an income cap, too.  

How much will bad credit cost you when you buy a house? 

Your credit score doesn’t only affect your ability to qualify for a home loan. It can also impact the interest rate a lender offers you on your mortgage. Therefore, just because you can qualify for a mortgage with bad credit (in certain circumstances) doesn’t necessarily mean it’s a good idea. 

If you have fair credit or bad credit, you’ll almost certainly pay a higher interest rate on your home loan if you’re approved for one. A higher interest rate will increase both your monthly payment and the amount of overall interest you pay throughout the life of your loan. 

Here’s an estimate of how much bad credit might potentially cost you if a lender charged you a higher interest rate on a 30-year, fixed-rate mortgage of $350,000 due to a poor FICO Score: 

Source: myFICO Loan Savings Calculator

These numbers reflect an estimate generated at the time of writing with a calculator offered by FICO. If you want to plug your own information in and create a more personalized and up-to-date estimate, you can use the online myFICO Loan Savings Calculator to do so. 

As you can see in the example above, having a FICO Score in the lowest range shown in the calculator (620-639) could cost you an extra $377 per month on your mortgage payment compared to someone with an excellent FICO Score of 760-850 in this hypothetical. And, over the life of the loan, you’d pay about an extra $135,773 in interest—assuming you never sold the home or refinanced the mortgage—compared to a borrower with an excellent FICO Score.

How to buy a house with bad credit

If you’re able to do so, it’s wise to try to improve your credit before you apply for a mortgage to put yourself in the best position possible. But if you need to get into a home loan before working to improve your credit score, the following tips might help improve your odds of qualifying for bad credit home loans. 

1. Check your credit to know where you stand

Before you apply for a mortgage or any type of financing, it’s smart to check your credit reports from Equifax, TransUnion, and Experian. You can access free copies of your credit reports via AnnualCreditReport.com. 

A mortgage lender will review your credit reports and scores when you apply for a home loan. So, it’s important to know where you stand as well. If you find mistakes on your credit reports, you can dispute credit errors with the appropriate credit reporting agencies. 

It’s also wise to check your credit scores too. Be aware that your credit reports typically will not include your credit scores—though the information in your reports is what your scores are based on. 

2. Compare multiple mortgage offers

Whether you have bad credit or good credit, it’s important to shop around and compare interest rates and loan programs from multiple lenders before you decide on a mortgage. According to government-sponsored enterprise Freddie Mac, homebuyers who take the time to compare loan offers could potentially save between $600 to $1,200 per year. 

3. Save a large down payment

When you have a bad FICO Score, it indicates to lenders that there’s a higher likelihood you might pay a credit obligation 90 days late (or worse) in the next 24 months. Lenders are understandably hesitant about loaning money to applicants who are less likely to pay their bills on time. 

But if you provide a larger down payment, it can reduce your loan-to-value ratio—a term referring to the amount borrowed for your mortgage compared to the appraised value of the home—and help the lender offset the higher risk associated with bad credit home loans. 

Learn more: What is down payment assistance?

4. Pay down debt

While not necessarily easy, paying down debt is another possible way to improve your chances of qualifying for a home loan. When you reduce your debt, it may lower your debt-to-income (DTI) ratio, which is a factor lenders consider when you apply for a mortgage. 

Plus, lowering certain types of debt—like credit card balances—could be good for your credit score. 

5. Add more money to savings

Increasing the money you have in savings (including investment accounts) is another possible way to reduce your risk in the eyes of a lender. Having extra assets could indicate to a lender that you have other resources to rely on if you experience financial hardship, like a job loss, in the future. The technical term for these funds is mortgage reserves.

The takeaway

Depending on the situation, it may be possible to buy a house with bad credit. But you should be prepared to jump through more hoops during the mortgage application process and pay a higher interest rate for your home loan. You might need to provide a higher down payment as well, depending on the loan program. 

Working to improve your credit, however, could put you in a better position during the homebuyer process. But if you don’t have the ability to wait, be sure to research your loan options and compare offers from multiple lenders before you fill out a mortgage application.

Whether you’re ready now or you decide to wait until your credit is in a better place, our step-by-step guide to buying a home can help you as you navigate the purchase.  

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