Homeownership in America is the largest source of wealth among families. But to own a home, you need to qualify for a mortgage. And to qualify for a mortgage, you need excellent credit.
A credit score of below 630 is considered to be bad. The average credit score in the US is 698, according to Equifax. Below 630, it becomes very hard to qualify for a mortgage. And 16% of Americans have scores worse than 630.
But it is not impossible to buy a house with bad credit. Let’s understand our options.
Can I Buy a House with Bad Credit?
Yes, you can buy a house with a bad credit score. Mortgage lenders care about bad credit, but they care more about your ability to pay back your loan. There are also several federal and state programs that’ll help you procure a loan, regardless of your credit.
Not to mention, you can adopt a few other strategies to improve your chances of qualifying for a mortgage with bad credit.
Here are a few strategies that can help you qualify for a loan with bad credit:
- Investigate Government Mortgage Programs: Programs like FHA, VA, and USDA typically have a much lower credit score requirement.
- Work on Improving Your Credit: You can also pursue some strategies to improve your credit history. This includes disputing incorrect credit report entries and making payments on time.
- Get a Co-signer: You can also ask a relative or a friend to co-sign your mortgage application with you.
- Bring More Cash to the Table: All lenders care about is your ability to pay back your loan. If you show liquid assets, that may alleviate their concerns in approving your mortgage application.
Let’s look at these strategies in more detail.
How to Buy a House: Everything you need to know about buying a house
What is the Minimum Credit Score to Buy a House?
Few mortgage lenders have a minimum credit score of 500, while others have set it to 580. For example, FHA has set the minimum score to 500. Fair Credit Score: 580-669. Poor Credit Score: 300-579.
The minimum score varies among lenders. It doesn’t matter that you have taken a loan with bad credit, as many lenders care more about if you will pay them every month.
» Mortgage Preapproval: Here’s how to get pre-approved for a mortgage!
What is a Bad Credit Score?
Lenders and card issuers set their own guidelines for bad credit scores. A bad credit falls below 630 on a scale of 300 to 630.
Scores from 630 to 689 are advised as fair credit. Individual lenders make their own decisions when willing to take the risks while offering home loans for bad credit.
Here’s how the categories usually fall:
|Excellent credit||720 and above|
|Good credit||690 – 719|
|Fair credit||630 – 689|
|Bad Credit||300 – 629|
How to Buy a House with Bad Credit?
Here are some types of home loans for borrowers with bad credit:
|Type of Loans||Minimum Credit Score|
Conventional loans are mortgages backed by the Federal Housing Finance Agency (FHFA). As of November 2022, the minimum FHFA loan requirement is a 620 credit score and a down payment of 3%.
But, there are exceptions to this. You can qualify for a conventional loan even though your credit score is lower than 620 if your income is higher than the minimum down payment.
United States Department of Agriculture (USDA) Loan
USDA helps families in rural areas become homeowners by offering loans at subsidized interest rates.
Due to the government’s support, mortgage lenders can frequently provide interest rates lower than those of conventional loans. Also, you can purchase a property with zero down payment if you meet the requirements, but you’ll still have to pay closing costs.
Types of USDA Loans:
- Direct Loans: Direct loans are issued for low-income borrowers with an interest rate of 1%.
- Loan Guarantees: Loan guarantees are types of loans issued by lenders associated with the USDA. They offer low-interest rates with minimal to no down payment.
- Home Improvement Loans: Qualified borrowers can make home repairs with issued improvement loans.
The Department of Veteran Affairs runs the VA Loan Program. Home buyers need to have a minimum credit score of 580 to qualify.
VA Loans are exclusively for active duty members, veterans, and, in some cases, surviving family members. You must procure a Certificate of Eligibility from the Department to get a VA loan with bad credit.
Federal Housing Administration Loans are one of the oldest loan facilities offered by the US government. They are characterized by low down payment mortgages for first-time home buyers. FHA loans have two main traits:
- A down payment requirement of 3.5%
- All the credit ratings accepted and allowed
👉 Please note that the FHA loan amount is subject to their insurance policy limits.
» Home Inspection: A home inspection can help buyers identify the hidden problems in a property before closing the deal. Read more to know more!
How to Buy a House with Bad Credit Near Me
How to Improve Your Credit Score?
Here is how you can improve your credit score:
1. Check the Report for Errors:
Examine your credit report closely. Verify if any account has been incorrectly updated or if the information is inaccurate. Flag those errors with the credit bureau or your creditor to get them rectified.
2. Build a Credit File:
When you open a new account, the bank will report your credit score to the credit bureau. This is the first step to building your credit file. The bureau recommends having an active credit account to help build your credit score.
3. Don’t Miss Out on Payments:
Your payment history is the most crucial factor in determining your credit score. A history of making payments on time can help your credit score. So, ensure you don’t miss out on any payments. Your score will be affected if you delay your payments by more than 30 days.
4. Only Apply if You Need Credit:
An inquiry is pulled on your report after you use a new line of credit. This kind of inquiry lowers your score temporarily. Also, it is not a great idea to apply for credit just to see if you get approved or because you received a pre-qualified offer.
5. Increasing Your Available Credit:
After you get a better handle on your credit score, increasing your available credit can help you raise more credit fast. You can do this by paying your balances or making a request to increase your limit. This will help you get a better credit score as it will decrease your credit utilization, which is also a big factor in determining your score.
Stay Away from Hard Credit Inquiries
Credit inquiries are of two types: soft and hard.
- Soft Credit Inquiry: When a lender or a financial institution pulls your credit report without your initiation, it is called a soft credit inquiry. Lenders often do this when offering pre-approved loans or credit cards. Requesting your credit report to check your score is also considered a soft inquiry.
- Hard Credit Inquiry: When you apply for a mortgage, the concerned financial institution procures and evaluates your credit report. This is considered a hard credit inquiry. Here, the credit report is being examined on your initiation.
Getting an insurance quote won’t directly affect your score but applying for any new type of credit can. Having too many hard inquiries can lower your credit score as inserts uncertainty in your application and indicates an increased risk to the lender.
How to Get a Mortgage with a Bad Credit Score?
Getting a mortgage with a bad credit score can cost you more, so it might seem appealing to continue paying rent. Here are some tips for getting a mortgage with bad credit:
Every lender is different, and each might offer a different rate of interest. Some might offer lower rates than others. A study shows that getting multiple quotes can help you save thousands of dollars over a 30-year mortgage.
Banks are not the only ones that lend money. There are other financial institutions and credit unions that want to lend to you. You can look around to find one which offers you the best deal.
Identify Red Flags:
There are advertisements that claim to provide guaranteed or pre-approved loans without checking your credit score. That’s a red flag. There are federal rules, where the lender must verify the borrower’s repayment capacity. There won’t be a “guarantee” unless that happens.
Co-sign Your Mortgage:
If your credit score is bad, you can ask your family member or friend with a better score to be the co-signer. If the co-signer is willing to take the debt, that can boost your application.
Down Payment Assistance:
Check for down payment assistance if you are worried about a down payment. There are over 2000 assistance programs available all over the country.
No Big Changes in Your Finances:
Don’t make any changes in your credit line, for example, getting a new credit line. This can push down your credit score. Try to avoid big purchases or getting a new credit card while applying for a mortgage.
» Mortgage Brokers: Mortgage brokers are the intermediaries between mortgage lenders and home buyers. Check out this blog to learn more.
How to Check Your Credit Score?
When you start using a credit card, you get a report associated with your name. You can even get a credit score without owning a credit card. For example, if you had ever taken a loan or had bills in your name, you would already have a score. Here are some ways how you can check your credit score:
- Check your bank statement: Check with your bank or look at your credit card or loan statements. Usually, you find your loan score online after logging into your bank account. If not, you might need to opt for a service to receive your scores.
- Free score service: Many companies offer free credit score checking. However, check their terms and conditions before signing up.
- Bureau or credit provider: You can also check your score through major credit providers or lenders. Other paid providers are also available.
Final Take on How to Buy a House with a Bad Credit Score
You can improve your credit scores by altering your spending habits, even a few small changes can go a long way. However, having a bad score does not mean you cannot own a house; all you need is qualifying credit.
So, take your time to assess all your options while applying for a home loan with a bad credit score.
» Home Appraisal: Find out all there is to know about Home Appraisals in this blog.
Frequently Asked Questions
Can I buy a house with Bad Credit?
Yes, you can buy a house with bad credit. Mortgage lenders accept many applications from first-time home buyers with low credit scores.
What is a good credit score?
Usually, credit scores from 580 to 669 are considered fair; 670 to 739 are considered good; 740 to 799 are considered very good, and 800 and up are considered excellent.
How can I get a loan with bad credit?
Various banks, credit unions, and online lenders offer loans to those with poor credit. Every lender is different, and each might offer different rates. Some might offer lower rates than others.
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- Closing Costs for Buyers: What are the closing costs as a buyer? See what’s the real cost and how you can negotiate your closing costs as a buyer.
- Who Pays Closing Costs: Want to know which closing costs you will be responsible for? Read on to find out!
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- How much is Title Insurance: Check out this blog to know how much title insurance is going to cost you!
- Foreclosure meaning: Check this blog to learn more about foreclosure and how to avoid it.
- Real Estate Companies: Check out this blog for the best real estate companies for hassle-free transactions!
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