Buying a house is absolutely possible with bad credit, but it is harder and more expensive than it would be for people with excellent credit. Before starting the homebuying process, you should consider why you want to be a homeowner. Show
Homeownership has many large, unexpected costs that can be difficult to cover if your financial situation is unstable. Continuing to rent indefinitely or until your credit improves may be the best financial choice for you. Key Takeaways
FHA Loans—Your Loan Option for Bad Credit Federal Housing Administration (FHA) loans are loans insured by the
FHA but actually issued by any FHA-approved lender. FHA loans were created to help low- and moderate-income borrowers become homeowners. If individuals can’t get approved for
conventional mortgages, then FHA loans are the remaining option for hopeful homebuyers with bad credit. FHA loan requirements are:
Improve Your Credit ScoreTaking a few steps to improve your credit score before home shopping will improve your homebuying experience exponentially. In today’s hot real estate market, many home sellers are less likely to choose offers with low down payments that will require them to deal with the FHA’s stringent appraisal process. Improving your credit score can allow you to get a conventional mortgage and make stronger offers on homes that are more likely to be accepted.
Why You Should Improve Your Credit Score Before BuyingEven improving your credit score by just a few points before buying can still save you thousands of dollars. If boosting your score allows you to be approved for a conventional mortgage instead of an FHA loan, you will save the up-front mortgage insurance premium of 1.75% of the loan amount. Additionally, conventional loans tend to have lower closing costs and interest rates than FHA loans. While both FHA loans and conventional loans will require monthly mortgage insurance if you put down less than 20%, an FHA loan includes monthly mortgage insurance for the life of the loan that you can only get rid of by
refinancing—and paying closing costs on a new loan. For a conventional mortgage, the
private mortgage insurance drops off once your loan balance is equal to 80% of the property value. Optimize the Rest of Your Borrower ProfileYour credit score isn’t the only factor that goes into being approved for a loan. You can increase your likelihood of being approved for a loan under favorable terms even with bad credit by optimizing the other parts of your borrower profile. Putting more money down on your mortgage essentially means that you are putting more of your own collateral into the loan and makes the lender view you as less likely to default and as a lower-risk borrower. If you are struggling to come up with down payment money, there are many unique ways to beef up your funds. Some areas even have down payment assistance programs. Improving your debt-to-income (DTI) ratio can also help you get approved for a mortgage with bad credit. If you can pay off or get rid of some of your monthly debt obligations like a car loan, then your DTI will improve. Increasing your income by picking up a second job will also improve your DTI. The easiest way to improve your DTI is by shopping for homes at the lower end of your budget. If you determine that
you can afford a house up to $300,000, but your credit score is still lower than you would like, you can increase your odds of being approved for a mortgage if you choose a house that costs $250,000. Loan Options for Unique PopulationsIf you meet certain criteria, you may qualify for a U.S. Department of Veterans Affairs (VA) loan or a U.S. Department of Agriculture (USDA) loan. Both of these loan types allow you to put 0% down without paying private mortgage insurance and do not require a minimum credit score, which makes them a much cheaper option than FHA loans. VA LoansYou typically have to be a veteran who served for certain time periods or under specific circumstances or be a surviving spouse of a veteran with specific circumstances. VA loans are issued by private lenders but backed by the VA. You must have a Certificate of Eligibility from the VA to get a VA loan. USDA LoansThese loans are typically in areas designated as rural by the USDA. Borrowers must meet income eligibility limits based on the median income of their county and their household size. Is it harder to get a mortgage with bad credit?Yes. Bad credit makes it harder to get a mortgage. Fewer lenders offer Federal Housing Administration (FHA) loans than conventional ones. Can I get a conventional mortgage if I don’t have 20% down?Yes. You can get a conventional mortgage with as little as 3% down, provided that you meet the rest of the lender’s requirements for credit score, income history, and debt-to-income ratio. Should I pay for credit repair before I go home shopping?Try to get an estimate from the credit repair service of how many points they can improve your score by and how much their service will cost in total. If they can improve your score enough to qualify for a non-FHA mortgage, then you will save 1.75% in up-front mortgage insurance premiums ($1,750 per $100,000 of house), which will probably offset the cost of the credit repair service. You may be able to improve your credit score yourself, so do your due diligence. The Bottom LineIt is possible to buy a home with bad credit, but it may not be the best choice. FHA loans are a great tool for borrowers, but changes to the program after the subprime mortgage crisis make them a very expensive loan product. Prospective borrowers should run the math to see how much improving their credit and having more money to put down could save them before rushing into the homebuying process. What is the lowest credit score to buy a house?Generally speaking, you'll need a credit score of at least 620 in order to secure a loan to buy a house. That's the minimum credit score requirement most lenders have for a conventional loan. With that said, it's still possible to get a loan with a lower credit score, including a score in the 500s.
Can I get a loan with a 500 credit score?Lenders can consider giving a personal loan to a borrower with a 500 credit score. However, most lenders have preset requirements that help determine who can qualify for a loan. If you have a 500 credit score and need a personal loan, you should identify subprime lenders.
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