How to Buy a House With Bad Credit

You can buy a house with bad credit. 

According to government data, since 2018, lenders have been making more loans to buyers with below-average credit scores. But, having a lower credit score can affect your mortgage rate, your closing costs, or how much down payment you’re required to make.

The good news is that small changes to your credit can yield significant changes in your score, and with every 20-point improvement, you can potentially save money.

Do you know what your current mortgage credit score is?

If you haven’t had your credit checked by a mortgage company in the last 90 days, it’s smart to get pre-approved before looking for a home – even if you’re in the “thinking about it” phase.

Most first-time home buyers have never had their credit examined by a lender, and when they do, 34 percent find mistakes. Those errors can affect your approval.

Use time to your advantage. Get a mortgage pre-approval and gain access to your mortgage credit report. Whether your credit history is strong or weak, you’ll have a clear plan forward.

Let’s review buying a house with bad credit.

What is Considered Bad Credit?

Bad credit is when your credit score or payment history is worse than you want it to be. The good news is that, to a mortgage lender, there is no such thing as “bad credit.” There is only qualifying credit, which is the minimum score required to approve a mortgage application.

Some mortgage lenders enforce a qualifying minimum credit score of 500, and others set their floor at 580 or 620 or higher.

Minimum credit scores vary among lenders because lenders don’t care what your credit score is exactly. What they care about is whether you’ll pay them back each month, and your credit score is a leading predictor.

Lenders also care about your employment stability, your annual income, the home you’re buying, and more. 

5 Home Loans For Bad Credit  

You can still buy a home and get great rates if your credit score is low. You can even get government subsidies to make your home-buying easier.

There are five standard mortgages for buyers with bad credit.

1. Conventional Loans: 620 minimum credit score

Conventional loans are the generic name for mortgages backed by the government’s largest mortgage agency, the Federal Housing Finance Agency (FHFA).

The FHFA backs 81 percent of all U.S. mortgages, so your mortgage will probably be backed by the FHFA, too. 

Currently, conventional loans require home buyers to carry a 620 minimum credit score and make a minimum down payment of three percent.

2. USDA Loans: 620 minimum credit score

The USDA loan is a no-down-payment mortgage for buyers in rural parts of the country and lower-density suburbs. The U.S. Department of Agriculture subsidizes the program. It requires home buyers to have a minimum credit score of 620 at the time of purchase.

3. FHA Loans: 500 minimum credit score

FHA loans date back to 1934 and are the original “bad credit” mortgage loan.

FHA loans require a minimum 500 credit score, and applicants with credit scores of 500 or higher can make a 3.5 percent down payment. The FHA even makes provisions for buyers with no credit score whatsoever.

4. VA Loans: 580 minimum credit score

VA loans are a no-down-payment mortgage for veterans and active-duty members of the military. The Department of Veterans Affairs runs the VA loan program. It requires home buyers to show a minimum credit score of 580 at the time of purchase.

Check your eligibility for VA Loan.

5. Homebuyer Assistance Programs: 500 minimum credit score 

Home buyer assistance programs aren’t mortgages, so they rarely enforce credit score minimums. Instead, they adopt the standards of the mortgage with which they’re combined.

For example, if you’re a home buyer who uses an FHA mortgage with a 580 credit score requirement, the home buyer assistance program you use for a down payment will also use the 580 minimum. 

How To Improve Your Credit Score Before Buying

Credit scores are temporary, so you can change them by changing your behaviors. Even slight changes can make significant differences. 

So, whether your timeline to buy a home is six weeks, six months, or longer, you can improve your credit with time.

Here are five simple ways to improve your credit and save money on your mortgage, plus two shortcuts.

1. Check your credit report for errors

More than one-third of mortgage credit reports include a reporting error, which lowers your FICO score.

You can preview your report before you apply from AnnualCreditReport.com. You can also get your mortgage credit report as part of an online mortgage pre-approval. 

Errors are pervasive for renters who’ve changed residences a lot, people who pay or defer on student loans, and men and women who have changed their legal names.

Credit reporting errors can affect your score by more than 100 points.

2. Pay your bills on time, every time

Another terrific way to improve your credit score is to make on-time payments to your creditors. In as few as 30 days, you’ll start to see improvement.

If money is tight and you cannot afford to pay all your bills each month, prioritize minimum payments, at least. Minimum payments are still on-time payments. Missed payments, however, are derogatory events which affect your FICO.

3. Give yourself a credit cushion

The second-largest component in your credit score is how much credit you have in your name. It’s good to have a lot of available credit, which can feel like a counter-intuitive concept.

Lenders want you to have vast credit lines because they know life is unpredictable. When things go sideways for you, those credit cards can help keep you afloat, so you have money to keep paying your mortgage.

Play this to your advantage. On the back of every credit card you own, you’ll find a customer service number. Call it and request the maximum increase to your credit limit possible without performing a hard credit inquiry.

You could reap 50-point gains or more.

4. Keep your credit accounts open (for now)

Just like adding to your available credit can help raise your overall score, removing your available credit can move your score down.

Resist the urge to close the old credit cards you never seem to use; and, the personal charge card for the store you never visit. Those open accounts are part of your score, and every point helps. 

5. Avoid new credit cards and new debt

Sometimes, opening a new card is unavoidable. But, do your best to work with the credit you already have. Don’t open a new credit card, don’t apply for a new auto loan, and sign for a new personal credit line. Each of these actions will lower your overall score.

Bonus 1: Become an authorized user 

The credit agencies let two or more people share credit, so ask a family member to add you as an authorized user on their credit accounts. As they pay their bills each month, you’ll get the benefit of additional on-time payments. 

Caution: If your family member misses a payment, it will count as a missed payment for you, too. 

Shortcut 2: Utilize a credit builder tool

After the Great Recession of 2009, subscription-based credit companies emerged to help consumers build good credit. One credit builder, StellarFi, will automatically pay your bills to build your credit. Then payments are directly reported to Experian®, TransUnion®, and Equifax®, to build a positive payment history for its members quickly.

Common Questions Readers Ask About Bad Credit

Here are some of the most common questions from our readers:

Can you buy a house with a 500 credit score?

Yes, FHA mortgage guidelines allow for home buyers with a 500 credit score. However, if you have a 500 credit score and you’re not buying a home in the next 30 days, you may have time to improve your credit score to an FHA standard 500 score, and then a conventional mortgage minimum 620 FICO to maximize your mortgage options.

What is the first step to buying a house with bad credit?

The first step to buying a house with bad credit is to get an official mortgage pre-approval. Your pre-approval will reveal your credit score, show your mortgage options as of today, and give a path forward for higher scores. Start this step now if you’re not buying a home in the next 30 days. 

How can I buy a house with bad credit and good income?

You can buy a home with bad credit and good income because mortgage lenders look at your complete mortgage application — not just one part of it.

Does medical debt impact my credit score?

All five government mortgage groups ignore medical collections. Non-government-backed loans may treat medical debt differently, so always be sure to check with your lender.

Learn more about how medical debt impacts credit score.

Final Thoughts: Start With a Pre-Approval

When you’re buying a home, there’s no such thing as “good credit” or “bad credit” – there is only qualifying credit. So, get started today with an online pre-approval.

It’s never too early to get started, but it sometimes can be too late.