You don’t need an excellent credit score to buy a house; buying a house with bad credit is possible. While you won’t get the lowest rates or best terms, there are options when you have less-than-perfect credit and want to buy a house. Of course, in a perfect situation, you’d fix your credit before buying a house, but if you’re in a hurry, here’s how it works.
What is the Lowest Credit Score to Buy a House?
First, you should know that lenders consider ‘bad’ credit any score less than 670. That’s the traditional scoring model, so anyone with a score lower than 670 will need alternative options for mortgage financing.
Fortunately, credit scores between 580 to 669 are considered fair, and many mortgage lenders have options for it, allowing you to secure a mortgage.
So the lowest credit score to buy a house depends on the lender but is typically 580, but some programs allow scores as low as 500.
Is Buying a House with Bad Credit Possible?
Buying a house with bad credit is possible, but you’ll need compensating factors for the risk.
In other words, you must show lenders you are a good risk despite your lower credit score. Some common compensating factors include:
- Large down payment – If you can put more than the minimum down payment, you reduce the risk you pose and may get approved with a lower credit score.
- Low debt-to-income ratio – The less debt you have outstanding when you apply for a mortgage, the less risk you pose to a lender. Keep your credit card and other loan balances down for the best results.
- Reserves – Any money you have as liquid assets, such as money in savings accounts, can be reserves. This is money you can use to make your mortgage payment if your income stops or is reduced.
How to Buy a House With Bad Credit
You’ll have to look around for a loan if you have bad credit. Unfortunately, most borrowers with bad credit don’t qualify for conventional financing, but with these steps, you may find the financing you need.
Look Beyond Banks
If you have bad credit, don’t apply for a mortgage with your local bank. They typically have tough qualifying requirements and only a few programs for those with great credit. Instead, look at online lenders and mortgage brokers to get your needed funding.
Consider Government-Backed Loans
Government-backed loans have lower credit score requirements than typical mortgage loans. For example, FHA loans require a minimum 580 credit score and 3.5% down and a 500 credit score with a 10% down payment.
The VA doesn’t have specific credit score requirements for veterans and surviving spouses, and USDA loans require a 640 credit score.
Use a Co-Signer
If you can’t get approved for a government-backed loan yourself, consider asking a close family member (with good credit) to be a co-signer. Only do this if you are comfortable with the mortgage payment and know you’ll stay on top of your obligations. Co-signers are just as responsible for the mortgage as you are, especially if you stop making payments.
How to Raise Your Credit Score Before Buying a House
If your credit score isn’t high enough to buy a house, or you want better rates and terms, consider these tips to increase your credit score:
- Bring all late payments current
- Keep paying your bills on time
- Lower your outstanding credit card balances
- Don’t apply for new credit
- Don’t close any old credit accounts
- Ask for a credit line increase from your credit card companies (but don’t use it)
Home Loan Options for Buyers With Bad Credit
Here are bad credit loan options if you need a loan now.
Conventional Loans
Conventional lenders typically require a credit score of at least 670, but some lenders allow lower scores. The key is to have compensating factors or ways to ‘make up for the low score.’ If you can compensate for it and show you’re a good risk, you may still qualify for a conventional loan with bad credit.
Conventional loans require Private Mortgage Insurance until you have 20% equity in the home. You can then cancel PMI and lower your mortgage payment.
FHA Loans
FHA loans are much more flexible, sometimes allowing credit scores as low as 500. You’ll need at least a 3.5% down payment (with a 580 credit score) to prove that you’ll occupy the home as your primary residence. FHA loans aren’t for vacation homes or investment properties.
Also Read : FHA vs. Conventional Loan
FHA loans require mortgage insurance for the life of the loan. So as long as you have the loan, you’ll pay 0.85% of the outstanding balance in annual mortgage insurance premiums.
VA Loans
Veterans or surviving spouses of veterans may qualify for VA financing. Each lender sets the minimum credit score as the VA doesn’t require one, and veterans can borrow 100% of the sales price.
VA loans are also only for primary residences, and you must be eligible for VA benefits and provide your Certificate of Entitlement to prove you’re eligible.
USDA Loans
USDA loans are for borrowers who don’t qualify for any other financing and don’t currently own a home. You must buy a home in a ‘rural area,’ which the USDA has loose guidelines about, and you can borrow up to 100% of the sales price.
USDA loans require a minimum 640 credit score, and you must also use the home as your primary residence only. The USDA also requires that the home be modest for the area.
USDA loans have mortgage insurance for the loan’s term, but the amount is lower than FHA loans. USDA loans require 0.35% of the outstanding balance annually.
Final Thoughts
Buying a home with bad credit isn’t as hard as it seems. Borrowers have many options depending on their circumstances.
Explore your options and look at the big picture to determine which loan makes the most sense. For example, consider the loan’s down payment requirements, interest rates, and total cost of the life of the loan.
