How to Buy a House with Bad Credit in 2023?

Do you dream of owning a house but are worried about your bad credit? Don’t let past financial setbacks hold you back from achieving homeownership. With the right knowledge and strategies, you can still buy a house even with less-than-perfect credit.

16% of Americans have bad credit. It is crucial to understand that having bad credit doesn’t automatically disqualify you from getting a mortgage. Lenders consider various factors to assess loan applications. Credit history is just one piece of the puzzle.

Let us guide you through the process of buying a house with bad credit, empowering you to turn your dream into a reality.

What Do Mortgage Lenders Consider a Poor Credit Score?

Mortgage lenders consider a credit score of below 620 as “poor” or “subprime”. Lenders often have their own criteria for determining the credit score needed to buy a house.

It is important to note that this is not a universal standard. Many lenders use the FICO score, which ranges from 300-850. You need a credit score of at least 580 to be in the “fair” credit category. Similarly, a good VantageScore should be in the range of 661 to 850.

In addition to the credit score, mortgage lenders also consider multiple other factors. These include credit history, debt-to-income (DTI) ratio, employment and income stability, and down payment.

How to Buy a House With Bad Credit in 5 Easy Steps

Despite having bad credit, it is still possible to purchase a home and secure favorable interest rates. Here are five steps to help you learn how to buy a house with bad credit.

Step 1: Analyze Your Credit Score

Take a look at your credit score before applying for a mortgage. Here’s how you can look up your credit history:

• Get Your Credit Reports: You can request a free copy of your reports once a year from AnnualCreditReport.com. Take the time to properly check your credit history.
• Review Your Credit Reports: Carefully examine each credit report for errors or inaccuracies. Look for any late payments, defaults, or negative marks impacting your credit score.
• Dispute Errors and Inaccuracies: File a dispute with the credit bureaus if you discover any problems or inaccuracies in your credit reports. Request that the inaccuracies be deleted or fixed and provide evidence to support your claim.

Step 2: Explore Bad Credit Home Loan Options

A low credit score may not rule out homeownership. Explore alternative loan options that can help you secure financing. Here are some home loans for bad credit:

• Conventional Loans: Conventional mortgages are loans that are not backed by the government. Instead, private lenders such as banks and credit unions offer them.
• FHA Loans: The Federal Housing Administration backs FHA Loans. With more flexible credit requirements, these loans require a lower down payment compared to conventional mortgages. This government-backed loan especially benefits first-time home buyers.
• VA Loans: Available to eligible veterans, active-duty service members, and their spouses, VA loans are guaranteed by the Department of Veterans Affairs. They often have more lenient credit requirements and may not require a down payment.
• USDA Loans: The U.S. Department of Agriculture offers USDA loans to encourage homeownership in rural areas. These loans have flexible credit guidelines and may offer low or no down payment options.

Step 3: Get a Mortgage Pre Approval

Mortgage preapproval for a home loan shows sellers you are a serious buyer and won’t waste their time. Contact a lender to begin the process even if you are unsure about your loan eligibility.

A mortgage preapproval can tell you if you qualify for a loan. Additionally, you also get to know mortgage interest rates and monthly payments. This way, you have a clear idea about your home ownership costs.

If your credit score is too low to get a mortgage, your loan officer can explain what’s preventing you from getting a loan. They can assist you in developing a plan to enhance your credit.

Step 4: Make Other Financial Improvements

A credit score is not the only criterion that a mortgage lender considers. Other factors, like income, savings, and previous loans, are also significant.

Create a budget to manage your finances effectively. This helps you track income, expenses, and savings goals. A well-managed budget can show lenders that you are financially responsible and capable of meeting mortgage obligations.

Clear off any outstanding debts and negotiate payment plans if needed.

Step 5: Avoid Making Credit Mistakes

Prior to buying a property, you might not have enough time to improve your credit score. However, you can avoid these mistakes that could harm your chances of obtaining a mortgage.

• Late or Missed Payments: Avoid making late payments or missing payments altogether, as they can significantly damage your credit. Set up reminders or automatic payments to ensure timely payments.
• Opening New Accounts: The lender runs a hard credit check when you apply for a new credit card. This can temporarily lower your credit score.
• Closing Existing Accounts: Closing old credit accounts can reduce your overall available credit and shorten your credit history. This can negatively impact your credit score.
• Using All Available Credit: Try to keep your credit usage low. Aim to keep your credit card balances below 30% of the available limit to maintain a healthy ratio.

🤔 What is a hard credit check?




A hard credit check is a thorough examination of your credit history, typically performed by lenders when evaluating a credit application. It can negatively impact your credit score.

How to Get a Home Loan With Bad Credit?

A bad credit score can make it more challenging to secure a home loan. Here are some ways to improve your chances of getting a mortgage with bad credit.

1. Build up Your Credit Score

Improve your credit before applying for a mortgage. Pay your bills on time, minimize your debt, and correct any inaccuracies on your credit record. Small improvements in your credit score can make a difference in loan approval and terms.

Another strategy to improve your score is to keep your credit use low. Keep your credit card balances under 30% of your maximum credit limit.

» Know More: How to Fix My Credit to Buy a House?

2. Save for a Larger Down Payment

Even with a poor credit score, you may be able to obtain a mortgage with a good down payment. A greater down payment lowers the loan-to-value ratio. Consequently, lenders will be more willing to grant you a loan despite your poor credit.

Saving for a larger down payment shows lenders that you are financially responsible and committed to the property. It indicates that you can save and manage your finances effectively.

3. Find a Co-Signer

Consider finding a trusted individual with good credit to co-sign the loan with you. Their creditworthiness can help strengthen your loan application and increase your chances of approval.

However, remember that the co-signer or joint applicant also takes on responsibility for the loan.

4. Shop Around

Different lenders have different requirements. Some may specialize in working with bad credit holders. Look for alternative lenders, such as credit unions or online lenders, who may have more flexible standards.

Additionally, you can compare mortgage rates, loan terms, fees, and closing expenses by shopping around with multiple poor credit lenders.

How to Buy a House With Bad Credit Near Me

Disadvantages of Buying a House With Bad Credit

Buying a home with bad credit can come with several disadvantages and challenges. Here are some key drawbacks to consider:

• Higher Interest Rates: Lenders typically view bad credit holders as “higher-risk borrowers”. You may be offered a higher interest rate on your mortgage loan. This can significantly increase the overall cost of borrowing and lead to higher monthly mortgage payments.
• Limited Loan Options: Your loan alternatives are limited if you have bad credit. You may need to look for loan programs developed exclusively for bad credit holders. Bad credit loans often come with less favorable terms, higher fees, or stricter requirements.
• Higher Down Payment Requirements: Lenders may require a larger down payment if you have bad credit. This is their way of reducing the risk. Saving for a larger down payment can be difficult, especially if you’re already facing financial challenges.

Bottom Line

You may enhance your credit scores by changing your spending habits. Even minor adjustments can make a big difference. However, having low credit does not mean you cannot own a home. All you need is qualifying credit.

Alternative loan options can still provide an opportunity for homeownership. Carefully consider the terms, interest rates, fees, and the overall impact on your financial situation before you commit to any loan.

Work with a reputable mortgage professional or financial advisor. They can help you navigate alternative mortgage options and make informed decisions.

Frequently Asked Questions

how to buy a house with bad credit