How to Buy A House with Bad Credit

We’ll talk about how to buy a house with bad credit in this article, knowing your credit score, how to apply for a mortgage, and how to improve your score quickly.

It can be daunting the thought of buying a house. Starting the process of home buying with bad credit will make it seem almost impossible to get a loan.

But did you know there’s something like bad home loans on credit? Maybe your credit isn’t as much a roadblock as you thought.

What is a poor credit score considered by mortgage lenders?

This is not known to most borrowers, but there is no clear minimum credit score required by any lender to buying a house. When it comes to the credit score, the Catch-22 is a traditional mortgage lender that is free to set its own parameters.

And even though government-backed loans give mortgage lenders some peace of mind, even though they are typically much smaller, they do have credit score criteria.

But if you have a credit score lower than 500, you may find it a little difficult to get a mortgage and you will probably have to concentrate first on increasing your score.

Can I buy a house with bad credit?

According to Experian TM, one of the three major credit bureaus, anything less than a 670 FICO® score is deemed ‘poor’ or ‘subprime’ when it comes to the actual amount.

More precisely, 580-669 is a fair score, while 300-579 is a bad score. The thing about getting bad credit is that it’s not the same as bad credit from anyone else.

No two circumstances are the same, and lenders will also look at items outside of your actual score, such as:

• How much you have available for a down payment
• If you have an overall low amount of debt
• How much income you have
• If you have any debts in collections

Cash is your best friend when you have poor credit. The more you need to use that to make a down payment, the better.

The reasoning for this is that your credit score will only qualify you for a certain amount of housing. You can still afford the home you want if you can cover the difference with cash.

As all lenders will have different criteria, the lender you end up with will also play a part.

And while you will get a bad credit mortgage loan, due to much higher interest rates, you need to be prepared to make a higher monthly payment.

But do not forget, you can still restore your credit and refinance your mortgage for even better terms if you buy a home despite getting bad credit.

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Home Loan Options For Buyers With Bad Credit

Loans guaranteed by the government and traditional loans would be the two main forms of mortgage loans.

The distinction between the two is that the federal government does not back or insure a traditional loan, however, government-backed loans do.

You will find that your down payment, your credit, and your debt-to-income ratio will have lower criteria for a loan guaranteed by the government.

Often, for lenders, these loans are less costly.

Let’s check out some of the available loan options and the average credit score specifications for each of them:

Conventional Loans

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There isn’t a set number for what your income, credit score, or down payment will need to be for you to qualify for a conventional loan.

However, you will usually need a 620 credit score or better to qualify for a conventional loan.

If you have more income or a higher down payment, it might be much easier to qualify for a conventional loan even if you have a score a bit lower than 620.

FHA Loans

An FHA loan is a loan backed by the Federal Housing Administration. If you’re a first-time homebuyer or haven’t purchased a home in the last 3 years, you could qualify for this loan.

The minimum credit score needed to get an FHA loan is usually around 580. If you can make a 10% down payment, you can probably get approved with a credit score between 500 – 579. Rocket Mortgage® requires a minimum score of 580.

FHA loans also have additional requirements that must be met for you to qualify for the loan. For instance, you can only use an FHA loan to purchase a primary residence.

VA Loans

If you’re a veteran or an active-duty member of the armed forces, you could qualify for a VA loan.  

A VA loan is backed by the Department of Veterans Affairs and allows any qualifying service member and their qualified spouse to buy a home with $0 down.

USDA Loans

A USDA loan is another loan backed by a government department, the U.S. Department of Agriculture.

A loan from the USDA allows you to buy a home in a qualifying rural area with a $0 down payment. 

Most lenders will require a 640 credit score to qualify for the loan, along with other income requirements specific to a USDA loan.

Best Home Loan Options For Buying a House With Bad Credit

The best home loan options for you, if you have bad credit, are going to depend on how bad your score is.

If you are in the 600 range, there are going to be more options available for you to choose from. If your score is below 600, you probably should look into an FHA loan.

Of course, the best option will be to work on improving your credit score.

Work On Improving Your Credit Score

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While this is not the answer borrowers want to read or hear, it’s the most practical and can save you thousands in interest payments.

Not only will you have more mortgage options, but you might be able to get your loan with a lower income requirement and down payment.

Of course, as stated above, if you have a score below 500, you probably won’t be able to do anything except wait until you increase your score.

If you have a bankruptcy on your credit, you will need to wait at least 2 years before a lender will start considering you for a new mortgage.

You can take the necessary steps to grow your score by understanding the following:

Payment history (35%): Your payment history is responsible for 35% of your score. This is the main reason why people are continually saying “pay your bills on time” when it comes to your credit score.

Credit utilization (30%): The amount of credit you are currently using is also known as your credit utilization and is responsible for 30% of your score. The more credit you’re using, the higher your credit utilization, the lower your score can become. It would help if you looked to keep your total credit usage under 30%.

Age of credit history (15%): This is most often referred to as your Average Age of Accounts and is one of the few factors you have almost no control over. Your credit history is basically the age of your oldest credit account, new credit accounts, and the average ages of all the accounts on your credit report.  

Credit mix/types of credit (10%): When you look at your report, you’ll notice that there are a few different types of credit on your report. Those can be revolving credit (e.g., credit cards) or installment loans (e.g., car loans or personal loans). Having a mix of credit is a good thing for your score, and it is responsible for 10% of it.

Amount of new credit (10%): Having an account less than 6 months old is usually considered having new credit. Your score will be impacted whenever you add a new account because it will give you a hard inquiry and also decrease your average age of accounts. Be mindful when applying for new credit.

How To Improve A Bad Credit Score Fast

When buying a house there are several things you can do to help improve your credit score fast.

Increase Your Available Credit

It would be best if you increase your available credit when you’re looking to improve your score fast.

You can do this by either paying down balances or making a credit limit increase request.

The reason this helps increase your score fast is that you will mostly be decreasing your credit utilization, which is a huge factor in determining your credit score.

And guess what:

Most credit card companies allow you to request as many increases as you like without it causing a hard pull on your credit.

Add New Accounts (In Bulk)

Adding new accounts also means you’ll be increasing available credit and increasing your overall credit mix.

Doing this in bulk is even better because it puts everything in the same time frame. Your inquiries will all fall off on the same day, any new accounts will age together, and you’ll add more available credit to your report.

This also allows you to establish an even stronger payment history on your credit report.

It usually takes less than 30 – 45 days to see the effects of adding bulk, new accounts to your report.