How to Buy a House with Bad Credit: A Step-by-Step Guide

A credit score below 620 might make it harder for borrowers to qualify for certain loan types or find lower interest rates. 

But if owning a home is part of your financial plan, there are home loans you can qualify for with a lower credit score. Here are some tips for buying a house with bad credit, plus ways to improve your score.

Can you buy a house with bad credit?

While you may not be able to access the same range of loan options or mortgage rates as someone with good credit, you can still get approved for certain loan types. Government-backed mortgage programs typically have no minimum credit score requirements set by the agency, though you’ll still need to demonstrate your financial readiness. Other loans may have very low credit score requirements, as long as you meet other qualifications.
 

How to improve your credit score before applying for a mortgage

If you can, take some time to improve your credit score before you apply for a mortgage. You may be able to raise it — and increase your odds of approval — by taking the following steps:

• Get current on accounts: If any of your accounts are past due, make a payment immediately to get it current. Past-due accounts will drag down your score.
• Review your credit report: By law, you can get free annual credit reports from Experian, Equifax, and TransUnion at AnnualCreditReport.com. Review your credit reports carefully to make sure they are accurate and don’t contain errors that could lower your score. If you find inaccurate information, you can dispute it with the credit reporting agency that shared the report.
• Make sure every payment is on time: Timely payments are the biggest factor when determining your credit score. Set up automatic payments, circle the date on your calendar, or set a reminder on your phone so you don’t miss any due dates. 
• Don’t close credit cards you don’t use: Leaving an account active — even if you don’t plan to use it — can help improve your credit score. It can demonstrate that you have a longer credit history and decrease your credit utilization ratio by making more credit available compared to what you borrowed. 
• Hold off on applying for new credit: Now is not the time to apply for new loans, financing or credit card accounts because they can cause a hard inquiry on your credit report. Hard inquiries can ding your credit score by a few points — usually five or 10 — and the effect can last for months.

Best home loans for buyers with bad credit

Not everyone has time to wait until their credit score improves. Some mortgage programs offer loan options for people with poor or fair credit scores. Three government-backed mortgage options for homebuyers with bad credit include:

FHA loans

Backed by the Federal Housing Administration (FHA), these loans are specially designed for buyers who can’t meet more stringent financial requirements, including first-time homebuyers. Here are some features of an FHA loan:

• Available to buyers who haven’t bought a home in the last three years
• 3.5% down payment required for buyers with a credit score of at least 580
• 10% down payment required for buyers with a credit score of at least 500
• Only available for your primary residence, and you must move in within 60 days of closing
• Mortgage insurance required upfront and as part of your monthly payment

USDA loans

Loans backed by the U.S. Department of Agriculture (USDA) are intended to help people buy homes in rural and suburban areas. You can even use a USDA loan to build a new home on your own land. These loans feature:

• No minimum credit score requirement
• Purchase price limits range from $398,600 to $970,800 by county
• Income eligibility limits, which vary by where you live
• Only available for your primary residence

County loan limits are published on the USDA’s website. 

VA loans

If you’re an eligible member or veteran of the military and meet the program’s active-duty requirements, you might be able to get a mortgage through the Department of Veterans Affairs (VA). Here are some features of a VA loan:

• No minimum credit score requirement
• No down payment requirement
• No mortgage insurance required
• Open to eligible veterans and members of the military
• Benefit can be used multiple times

What credit score do you need for different mortgage types?

For a conventional mortgage, you’ll typically need a good credit score, which is 670 or above using the FICO scoring model and 661 or higher (“prime”) using the VantageScore model. 

“Ultimately, any score in the 700s or above is considered good and will help you qualify for lower interest rates,” says Patricia Maguire-Feltch, managing director of Consumer Originations Sales at Chase Home Lending. 

For other mortgage types, aim for these typical credit score minimums:

Tips for getting approved for a mortgage with bad credit

Even with poor credit, homebuyers can use different strategies to qualify for a home loan.

Nikki Beauchamp, an associate broker with Sotheby’s International Realty in New York City, says it’s essential to show lenders you can reliably manage debt.

“Your debt-to-income ratio is always important — but one could argue it takes on more significance as a method of demonstrating your fiscal responsibility, even if your score isn’t exactly where you’d like it to be,” she says. 

She recommends the following tips for getting approved for a mortgage when you have bad credit:

• Review your credit report regularly, especially if you have a common name.
• Consider credit unions and local lenders, who may be more willing to use more than just your credit score when evaluating your mortgage application.
• Save up for a larger down payment than is required.
• Work on lowering your debt-to-income ratio (DTI), which is your monthly debts divided by your monthly income. Paying off credit cards can help.