How to Buy a House With Bad Credit

Key takeaway: Yes, it is possible to purchase a home with poor credit. Programs like FHA, VA, and USDA loans make it feasible for buyers with credit scores ranging from 500 to 620 to qualify – albeit with certain compromises such as higher interest rates or larger down payments.

Buying a home can be both thrilling and perplexing. It can also be disheartening when attempting to buy a house with a low credit score and not knowing where to seek guidance. Many individuals rent with the aspiration of going through the homebuying process and becoming a first-time homebuyer. While this dream may seem unattainable for those with lower credit scores, there are ways to achieve it whether you’re purchasing a home in Atlanta or exploring homes for sale in Boston. This Redfin guide will provide you with the necessary information on how to buy a house with bad credit.

Step 1: Know your credit score

Begin by determining your credit score through a credit report. Equifax, Experian, and TransUnion offer these reports at no cost. Depending on your credit score, you may need to put in some effort and time to reach the credit score required to purchase a house.

Step 2: Explore loan programs for buyers with bad credit

FHA loans

Supported by the Federal Housing Administration, FHA loans are among the most accessible options for buyers with credit scores as low as 500.

• Credit score of 580+: qualify with as little as 3.5% down
• Credit score of 500-579: minimum 10% down payment required
• Higher LTV ratios (up to 96.5%) allowed

Example: Buying a $500,000 home with a 96.5% LTV means you’d need a 3.5% down payment ($17,500) and could borrow up to $482,500.

VA Loans

Military veterans with a minimum credit score of 620 have access to Veteran’s Administration (VA) loans. If you can boost your credit score to qualify, additional VA loan benefits include:

USDA loans

United States Department of Agriculture (USDA) loans are available for homebuyers who are lower-income and considering buying in rural areas. The minimum credit score required to take out a USDA loan is 620.

• No down payment required
• No private mortgage insurance (PMI)
• Lower interest rates

Freddie Mac Home Possible loans

Home Possible loans make it simpler for first-time buyers to acquire homes. Home Possible is available to borrowers with low or moderate income and a credit score of 660:

• 3% down payment
• Down payment assistance programs are available

Fannie Mae HomeReady loans

HomeReady loans aid moderate-income borrowers by expanding eligibility for home loans in low-income communities. HomeReady necessitates a minimum credit score of 620 to qualify and is not restricted to first-time homebuyers.

• 3% down payment
• Ability to use additional income from roommates to qualify for the loan

Non-qualified (non-QM) mortgage

These loans do not adhere to traditional lending rules and may be suitable for individuals with scores as low as 500:

• Simplified qualification process
• Higher interest rates
• Ideal for self-employed borrowers or those with irregular income

Step 3: Enhance your chances of approval

Get pre-approved for a mortgage

One of the primary tasks on your agenda should be obtaining a mortgage pre-approval. Pre-approvals indicate the amount a lender is willing to lend you and at what interest rate.

Increase your down payment

Lenders are hesitant to lend money to individuals with low credit scores as they are considered high-risk. The simplest way to combat this is by increasing the down payment, which will open up more mortgage options.

Refrain from applying for new credit

New credit applications signal to lenders that you are stretching yourself financially. Any new financing agreements or loans could raise concerns when applying for a mortgage.

Ensure all your income can be verified

Lenders always want to confirm your income when you apply for a loan. Be sure to provide payslips and bank statements from the past 12 months.

Ensure you are registered to vote

Electoral roll data is a crucial tool for lenders to confirm your identity. While you can have an excellent credit score without voter registration, it may prove challenging to be approved for a mortgage.

Step 4: Enhance your credit score

While purchasing a house with a low credit score is feasible, boosting it will be advantageous in the long term. Focus on these financial habits to help improve your credit score if it falls below 580:

• Enhance your payment history
• Reduce your overall debt to improve your debt-to-income ratio
• Lower your credit utilization
• Review your credit report and dispute any inaccuracies
• Remove yourself from any joint accounts

FAQs about purchasing a house with bad credit

What constitutes bad credit according to lenders?

Mortgage lenders and the Federal Housing Administration (FHA) consider a credit score range when evaluating a home loan application. A credit score between 580-669 categorizes your credit as “fair” and is seen as a higher risk for a mortgage lender. Lenders deem a score of 579 or lower as “bad” credit. Scores at this level can make securing a home loan challenging, but not impossible.

Your credit score provides lenders with insights into your spending habits, payment reliability, and the likelihood of repaying a mortgage. Low credit scores indicate a higher risk for a lender but do not have to signify the end of your dream of homeownership.