November 17, 2021


When you start the process of purchasing a home, the first step is usually securing a loan. Buying a house with cash is the best option since buyers don’t need to rely on loan approval. However, most people can’t afford to do that. 

When you think about getting a loan, many times your first thought is “what credit score is needed for buying a house?.” The answer to this question might surprise you, as most people think that having bad credit means they can’t achieve their dreams of home ownership. 

Poor credit doesn't have to be the barrier you may think it is. Many mortgage lenders can let you know about specific home loans that might work for you. Some examples include an FHA loan, a VAa loan, or a USDA loan, all of which are government-backed loans. In addition, low credit scores can be improved if you know the right places to find helpful tips.

In this article, I will cover the loans that can help people purchase a home with bad credit. So, if that previous credit report has you down, cheer up because I have you covered! I will also offer advice on how to improve your credit score, which can help you qualify for the best loan possible.

What Is Considered Bad Credit?

Before we get into solutions for people with bad credit, let’s define what it really means. Afterall, you might be looking at your credit report and thinking that it stinks when it’s not really that bad. 

Equifax, Experian, and TransUnion, the three major credit bureaus, all have a credit file on you if you have ever borrowed money. This includes personal loans, car loans, mortgage loans, and credit cards, just to name a few. They know everything from your payment history, how much you owe, and how much of your credit you are using (also known as your credit utilization rate). 

All of this information is used to determine your credit score. The more often you pay on time and the fewer loans you have - compared to your income - the better your score. For example, if you took out a personal loan and stopped making payments, your credit score would go down considerably.  If you took out a home loan and paid it on time every month until the loan was paid off, your score would go up. Here is a more in depth look at how your credit score is calculated:

  • Payment History: This makes up 35% of your score, which is the highest percentage for any single factor. Lenders want to know if you make your payments more than anything else. 
  • Credit Utilization: This is the amount of your current credit that you are actively using and it makes up 30% of your score. If you are using a high percentage of your total credit, it will result in a lower credit score. If you lower your credit utilization rate, your credit score will go up. Try to keep this number under 30%.
  • Average Age of Accounts: This refers to how old your oldest credit account is, how new your newest account is, and the average age of all your accounts. This calculation, which unfortunately you don't really have much control over, accounts for 15% of your credit score.
  • Credit Mix: There are many different types of loans and having a variety is usually a good thing in terms of your credit score. Some types of credit are revolving, meaning they ebb and flow as you spend and pay. Credit cards are an example of revolving credit. Others are installment based, like when you slowly pay off a car or a home. 10% of your total credit score comes from your credit mix. 
  • New Credit: If you have a loan that is under 6 months old, it is considered new credit. These types of accounts can hurt your credit because they create a recent hard credit inquiry and reduce your average age of accounts. New credit makes up 10% of your overall score.

Now that you know how your credit score is calculated, you may be wondering what is considered a bad score. Credit scores range from 300 to 850, and anything above 699 is considered good credit. Borrowers with scores below 579 are considered to have bad credit. So, if your credit report indicates a score below 699, you have some work to do. 

Working on raising your score (more on that later) is an important step to take, but there are some loans available right away to help you buy a house, even if you have a bad credit score.

Home Loans For People With Bad Credit

Home Loans For People With Bad Credit

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Acquiring real estate starts with finding the best loan to use for purchasing. You don’t need to have great credit to do this. There are plenty of bad credit home loans available. There are even programs that offer down payment assistance. So, even if you don't have money saved up for a down payment and have a low credit score, you still may be able to get a mortgage and buy a house. 

Here is a look at the most common loans that help people with bad credit break down the financial barriers to home ownership.

FHA Loans

Federal Housing Administration (FHA) loans are available for first time home buyers and offer advantages to a conventional loan. FHA minimum credit score requirements are less than conventional loans, allowing people with lower credit scores to purchase their first property. For an FHA loan, you only need to have a credit score of 500 or better. 

These loans can only be used for buying a primary residence, so you can’t use them for investment properties or vacation homes. So, if you are a first-time home buyer looking to purchase your primary home, but your credit score isn't enough to qualify for a conventional loan, an FHA loan might be a great solution.  

VA Loans

Backed by The Department of Veterans Affairs, VA loans are available for veterans or current armed forces service members. One benefit of these loans is that they allow you to purchase a home with no money down. Finding enough cash to make a downpayment on a home (usually 20 percent of the price of the house for a conventional loan) is a huge barrier for some families. These loans help break down this barrier, but there are some restrictions beyond military service. 

There isn't a specific minimum credit score requirement, but usually it needs to be over 600, depending on the mortgage broker you work with. In addition, mortgage lenders typically charge a one-time “funding fee” to complete the loan.

USDA Loans

Offered to homebuyers in eligible rural areas, USDA loans are backed by the U.S. Department of Agriculture. These loans allow you to buy a home with no down payment, but lenders usually require a minimum credit score of 640. If you are looking for real estate in rural areas, this type of loan might be right for you.

Conventional Loans

Many people think that getting a conventional mortgage means you need to have good credit. Not so fast. There actually isn't a credit score requirement for these loans, though most lenders like to see a score of 620 or better. 

The factors for approval depend on the specific lender, so it pays to shop around. If your income is high and you can afford a larger down payment, but you have a low credit score, you may be able to convince a lender to approve you for this type of mortgage loan.

The Steps To Buying A House With Bad Credit

Keep the following steps in mind when attempting to buy a house while having a bad credit score.

Know Your Credit Score

Know Your Credit Score

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A number of free credit report websites can tell your credit history and current score according to the main credit bureaus. A few examples include TransUnion and Experion. Using the free credit reports you can find online is a good place to start your research, as they dont use hard credit inquiries. Hard credit inquiries can hurt your credit score, and are done when you buy a home, a car, or other large purchases. 

Your lender will do a hard inquiry during the final approval of your home loan, so make sure you are using resources that only do “soft pulls” to determine your credit score before you start looking for homes. 

Another benefit of checking your credit score is that it can immediately improve it. Sometimes there are errors that are negatively affecting your credit score. If you get them resolved, your credit score can go up to where it should have been in the first place.

Work on Improving Your Credit Score

Even if you have the lowest credit score possible, you can still raise it and increase your home loan eligibility. There are a number of strategies that will help, and you don't have to do all of them right away to improve your score. Focus on what you can do easily and go from there. 

Look carefully at your debt to income ratio, as this is a big factor in determining your credit score. Pay down as much debt as you can and look for ways to increase your income. This can mean pursuing a promotion at your job, or working a side job. It can also mean looking into paying down student loans or other outstanding loan balances to reduce your existing debt . 

Set up auto payments from your bank account to make sure you pay your bills on time. A stronger payment history is a great way to work toward a good credit score. With auto payments, your bills will get paid without you having to remember to pay them. Be sure to have as much cash as you can in your checking account to avoid overdraft fees. 

Even if you have available credit, don't use it if you can help it. Opening new credit cards can hurt your credit score. It may seem odd, but closing credit card accounts can hurt your score as well. The best thing to do is stop using the card without closing the account. 

Speaking of credit cards, review the features of the current ones you have. If one has a particularly high interest rate, start paying the balance of that one down before the others. In addition, many credit card companies will reduce your interest rate if you set up a payment plan with them and stop using the card. 

Improving your credit score comes down to paying your debts and increasing the amount of money you make each month. Be creative and look at every option that might help fix your bad credit.

Find a Lender You Trust

Find a Lender You Trust

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Finding a lender should be at the top of everyone’s checklist when buying a house. Most lenders would love to help you get a loan, but choosing the right one for you is the best way to ensure you get a mortgage that meets your specific needs. 

Before you find a loan officer to work with, you need to make sure you understand the loan types available to you. Use the information we covered here about the various loans that might work for you and continue your research to make sure you are as informed as possible.

Think about the general amount you want to spend on a home. How much have you saved for a down payment on a home? What amount do you think you will be able to afford in monthly mortgage payments? You don't need to iron out all the details before interviewing lenders, but having a general idea of what you are looking for is helpful.

Interview a number of different lenders before you decide to work with one. Compare their rates and talk to them about your individual financial situation to see if they are a good fit. Ask them about their philosophy towards lending. Do they recommend buying as expensive a house as you can afford? Or do they recommend a more conservative approach?

Be honest about your bad credit up front. If they aren’t able to help you, they will let you know right away. It’s important to figure this out in the beginning, so you can look for other options before you have invested too much time and energy.

Beyond the numbers, sometimes choosing the right lender has to do with your communication style, how they relay information, and how responsive they are. Make sure you feel like you’ve found someone you trust before asking them to help out with the house buying process.

Get The Loan So You Can Get The Home

Get The Loan So You Can Get The Home

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Once you have selected your lender, talk to them about the details of each type of loan they can make available to you. Ask the following questions

  • Which loan will result in a higher monthly mortgage payment?
  • How will a larger down payment affect the monthly payments?
  • When does mortgage insurance come into play and will I need to pay a private mortgage insurance premium?
  • How can you get the lowest interest rates possible?

Your mortgage lender should be able to answer all these questions and take you through the ins and outs of each loan option you should consider. They should also be able to pre approve you for a mortgage so you can start looking for houses. 

The final mortgage approval will occur right before you close on a home, but the pre-approval should be done right away, as it is necessary to include with any offer you decide to make on a house.

Summary: Bad Credit Doesn't Have To Stop You From Buying A Home

Having bad credit may make you think you don't have a shot at becoming a homeowner. And might make you give up on the home hunt altogether. 

Don’t let this negative thinking get you down though because there are still options. From a variety of loans that can help, to strategies to increase your score, bad credit doesn't have to mean you can’t get your dream home. 

Use the above information to navigate your way around and find the right type of loan for your specific situation.

About the Author

As a native Washingtonian, Carlos Reyes’ journey in the real estate industry began more than 15 years ago when he started an online real estate company. Since then, he’s helped more than 700 individuals and families as a real estate broker achieve their real estate goals across Virginia, Maryland and Washington, DC.

Carlos now helps real estate agents grow their business by teaching business fundamentals, execution, and leadership.

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