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If you want to buy a home but your credit needs improvement, you may worry that you won't be able to qualify for a mortgage. The good news is that it may be possible to get a home loan even if you have bad credit. Having poor credit history can make qualifying more difficult, however, and can mean paying more in interest.
Here's how to buy a house with bad credit, and how to decide if it would be better to wait until your credit has improved.
Can You Buy a House With Bad Credit?
Yes, it's possible to buy a house with bad credit. There isn't one set credit score required to buy a house, and it's possible to qualify for a mortgage even if your credit needs improvement. But a lower credit score does make it harder to qualify for a home loan and limits your home loan options.
On the other hand, the higher your score, the more options you'll have for credit, including home loans. If you're not in a rush, you may be better off taking the opportunity to improve your credit before you apply for a mortgage loan.
What Do Lenders Consider a Bad Credit Score?
The majority of lenders look at your FICO Scores to evaluate your creditworthiness. With this credit scoring model, a "good" credit score would be anything above 670.
When it comes to what score you need to qualify for a mortgage, here's what you need to know.
- If your credit score is in the mid-600s: You may be able to qualify for a conventional mortgage—that's a home loan that comes directly from private mortgage lenders—or a USDA loan.
- If your credit score is at least 500: A government-backed FHA loan could be an option if you can afford a 10% down payment.
- If your credit score is below 500: You might not be able to get approved for a home loan and may have to focus on getting your credit ready for a mortgage first.
Home Loans for Bad Credit
It can be difficult to qualify for a conventional mortgage if you have bad credit. Here are other borrowing options to consider.
FHA Home Loans
The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), has a home loan program that can help consumers with poor credit. With an FHA loan, the agency won't directly lend you the money. Instead, it insures home loans, meaning the FHA will repay the lender if a borrower defaults on a mortgage. The lenders can therefore be more lenient about credit and income requirements.
FHA loans require a credit score of at least 580 with a 3.5% down payment, or 500 with a 10% down payment. In general, FHA loans are more expensive than conventional loans for buyers with good credit or who can afford at least a 10% down payment. However, the FHA route could be the better option if you have poor credit or can only afford a small down payment.
VA Loans
If you're a service member, veteran or surviving spouse and meet the eligibility requirements, you may qualify for the U.S. Department of Veteran Affairs (VA) home loan program.
The VA backs loans, which is similar to the FHA program in that the VA insures the loan, but a VA-approved lender issues the loan. Technically, there's no credit score requirement for VA loans. However, many VA-approved lenders require a minimum credit score of around 620.
First-Time Homebuyers Programs
If you have poor credit and are a first-time homebuyer, you might also qualify for assistance programs. These are programs that can include mortgages with less-strict credit requirements than conventional lenders. First-time homebuyer programs may also offer other assistance, such as covering part of your down payment or closing costs.
Even if you've bought a home before, you may still qualify for a first-time buying program if it's been several years since you last owned a home. To find first-time buyer programs in your area, search online. Include the name of your state or county in your search for more localized results.
How to Buy a House With Bad Credit
Your credit can be an important factor in determining whether you can get approved for a mortgage, but it isn't the only factor that lenders consider. Here are tips for buying a home when you have bad credit.
1. Shop Around for Rates
No matter what your credit scores, you'll want to compare your loan options to get as low a rate as possible. The Consumer Financial Protection Bureau (CFPB) has a mortgage interest rate tool you can use to compare rates based on your state, credit score range and loan details. Government-backed mortgages, such as FHA and VA loans, are often a good starting point if you have poor credit.
2. Save for a Larger Down Payment
The larger your down payment, the more likely you are to be approved for a home loan. That's because putting more down lowers your loan-to-value ratio (LTV), which reduces risk for the lender.
In general, lenders like to see an LTV of 80% or less. But if you lack good credit, a larger down payment may be necessary. Plus, a higher down payment can help you get a lower interest rate. Saving for a large down payment isn't easy, but tweaking your budget can make it an attainable goal.
3. Lower Your Debt-to-Income Ratio
Your debt-to-income ratio (DTI) can be an important factor in qualifying for a mortgage. A lower DTI is better when you're applying for a home loan. Lenders typically look for a DTI of 43% percent or less (or, in some cases, 36% or less).
But if you're a low-credit borrower, aiming for an even lower DTI can ease lenders' concerns about your ability to manage bills. That can help you get approved.
4. Add a Cosigner
Adding a creditworthy cosigner to your application can also help you qualify for a mortgage with bad credit. But keep in mind that the cosigner will be legally responsible for the mortgage payments, and the mortgage could impact their creditworthiness and increase their DTI.
5. Increase Your Savings
Money in your savings account, money market account, investment accounts, stocks, bonds, CDs and the like all count toward your net worth. When you apply for a mortgage, lenders will look at all of your assets for evidence that you would be able to continue making payments—even in the event that you were with unexpected bills or lost your job.
How to Improve Your Credit Before Buying a Home
Even if you really want to buy a home right away, it might make more sense to work on your credit before you apply for a home loan. Here are tips for how to improve your credit before you buy a house.
- Continue making on-time payments. Making credit card and loan payments on time is one of the best ways to improve your scores. Even if you can only afford minimum payments, that's better than missing a payment altogether.
- Pay down revolving debt. Your credit utilization rate represents the percentage of your available revolving credit that you're using, and it's an important factor in determining your credit scores. Paying down your revolving debt, such as credit cards and lines of credit, can help lower your utilization rate and increase your scores. Be sure to keep your credit cards open, rather than closing them.
- Avoid new credit applications. Applying for new loans or credit cards can also lead to hard inquiries, which typically hurt your credit scores. Hard inquiries stay on your credit report for two years, but their impact on your scores generally lasts a year or less. It may be best not to apply for any new accounts if you're getting ready to apply for a mortgage.
- Get credit for your bill payments. You can sign up for Experian Boost®ø to get credit for the eligible bill payments you're already making. This feature is completely free and can improve your credit scores fast by using your own positive payment history.
Should You Buy a Home With Bad Credit?
If you have bad credit but aren't at the very bottom of the score range, you may still be able to qualify for a home loan. But even if it's possible to get approved now, waiting until your credit improves could save you a significant amount of money over time.
Having a low score often means you'll be stuck with a much higher interest rate. Because mortgages are very large loans that usually take decades to repay, even a 1% or 2% increase could lead to paying tens of thousands more in interest over the lifetime of your loan.
The Bottom Line
It's possible to get a home loan with bad credit—especially if you're able to qualify for an FHA or VA loan or put down a larger down payment. If you're able to hold off on buying, however, taking time to improve your credit can help you expand your mortgage options and potentially qualify for a lower rate.
To keep tabs on your credit throughout your journey to improve your score and buy a home, sign up for free credit monitoring through Experian. You'll have access to personalized advice on actions you could take to improve your score. Plus, you'll get notifications whenever there's a change to your report and score.