Yes, you can buy a house with bad credit, although it will be more difficult. But if you’re willing to be patient and understand that the process may be more challenging, you will eventually find a solution.
Credit scores offer a helpful metric to show a person’s general financial history that allows banks and underwriters to make faster, more informed decisions. But, it doesn’t necessarily tell your whole story or truly represent your sense of financial responsibility. So, many lenders will overlook a bad credit score if you can prove that you are working toward improving your financial situation.
Some first-time homebuyers have a low score simply because they haven’t had the time to build their credit. Or your score may be low due to a past financial event such as a foreclosure or bankruptcy that happened many years ago but still impacts your credit.
In that case, you may convince a lender to approve a mortgage if you can show that you’re getting your finances back on track. Be prepared to pay more than your average borrower – either through a higher interest rate or a larger down payment. But getting a loan with a bad credit score is still possible.
Get a Conventional Mortgage Loan
The first option is to get a conventional loan. Conventional loans are not backed by a government-sponsored entity such as the FHA, USDA, or FHA. While most lenders like to see a credit score in the high 600s, the minimum credit requirement for most conventional loans is 620.
While not backed by the government, most of these loans are insured by government-sponsored entities, Fannie Mae and Freddie Mac. The GSEs will not guarantee the loan if the borrower’s score is below 620. So, while each lender sets its credit requirements, most will not go below 620. So, if your score is lower than that, you may be denied or be required to pay a much higher interest rate.
Use a Government-Backed Mortgage
If you don’t qualify for a conventional loan, you may consider going with a government-backed mortgage. The Federal Government has several housing programs that help low-income Americans access affordable home loans.
The most common are programs offered by the Federal Housing Administration (FHA), Veterans Administration (VA), and the US Department of Agriculture (USDA). FHA loans are available to anyone, and they are typically used by low-income Americans with a high amount of debt. VA loans are specifically for those who served in the military as a benefit of service, while USDA loans are specifically for rural home buyers.
They each have their own requirements (see below). But borrowers with a credit score as low as 580 can qualify for a government-backed loan. So, if your credit score is between 580 and 620, you should consider one of these government-sponsored loan programs.
Get a Hard Money Loan
If your credit score is well below 580, there are other options you may consider. One potential option is to get a hard money loan. A hard money loan is a financial product offered by a private investor or investor group that is secured by an asset, for instance, real estate.
Hard money loans are most often used by house flippers who need short-term financing that can be paid off once the house is sold. But in certain situations, hard money loans can also be used to purchase a primary residence if the borrower does not qualify for a conventional loan or government-backed loan program.
Hard money loans often feature much laxer lending requirements, and, in some cases, you don’t even have to be employed. But they also typically feature much higher interest rates. For example, the average interest rate for a hard money loan is between 7 -15%, whereas mortgages are usually 3-7%.
So, a hard money loan may not be the best option if you plan on staying in the home for a long time. But if you want to purchase a home for a few years while you rebuild your credit, this could be an excellent temporary solution.
Find a Co-signer
Another option is to find someone to co-sign your loan. A mortgage co-signer is someone who agrees to assume the financial burdens of the loan if you are not able to make payments.
As long as you uphold your end of the bargain, the co-signer won’t have to do anything beyond signing the paperwork. But if you fall behind on payments, they become responsible for taking over the monthly payments.
Getting a co-signer may be enough to convince the lender to take a risk and approve you for a loan. But they must have solid credit and income to qualify. It doesn’t help much if you both have bad credit. But if the co-signer has a 700-credit score and you have a 570-credit score, this may be enough to push you over the edge and be approved.
Depending on your situation, it may not be easy to find a co-signer. But as long as you make the payments on time, there’s little risk or obligation that the co-signer must take on. So, try your best to convince your friends and family that you will be responsible for making payments, and you’ll likely find someone who will agree.
Pay All Cash
The final option is to forego the financing and pay cash for the home. There are no credit requirements to buy a home, only to obtain financing. Sellers don’t care about your credit score as long as they get paid.
In fact, they often prioritize buyers paying cash because they tend to close faster, and there’s no risk that the buyer won’t be approved for a loan. So, if you can save enough to buy a home for cash without getting a mortgage, you won’t be required to meet any credit or income requirements.
It may take you several years to save up the money, so you may be better off just working on your credit. But if you’ve suddenly come into some money from an inheritance or business project, paying cash will simplify the closing process and save you money on paying interest to the bank.
Conforming loans refer to those that meet the standards set by Fannie Mae and Freddie Mac. To qualify for a conforming loan, you need a credit score of at least 620, a debt to income (DTI) ratio of under 50%, and a loan to value ratio of at least 97%, which means you need at least 3% down. Some lenders may have stricter requirements, but these are the bare minimum. So even if you have a lower credit score, you can still get a conforming loan as long as your debt is in control and you have the money for a down payment.
FHA loans are those insured by the Federal Housing Administration. FHA loans require at least a 3.5% down payment for borrowers with a credit score of 580 and above. Those who can make at least a 10% down payment can be approved with a credit score as low as 500. Borrowers are also recommended to have a DTI ratio of 43% and below, although they may accept a higher ratio under certain conditions. So, if your credit score is well below 620, then an FHA loan may be your best option.
VA loans are those insured by the Department of Veteran Affairs that are available to military personnel. One of the major benefits of VA loans is that they don’t require any money down, and borrowers can get a loan with a credit score as low as 580. But you must meet the service eligibility requirements set by the VA. To qualify, you must have served at least 90 days of active service during wartime, 181 days of active service during peacetime, or six years in the National Guard or reserves. The spouses of military personnel killed in the line of duty or from a service-related injury also qualify for VA loans.
USDA loans are those backed by the US Department of Agriculture specifically for rural homebuyers. You can also get a USDA loan with zero money down, like VA loans. But you must meet their eligibility requirements. First, the home must be your primary residence and located in an eligible rural area. The borrower must also have a stable and dependable income and a credit score of at least 640. Plus, the annual household income must not exceed more than 115% of the median income in the area.
Be Patient and Shop Around
It’s important to realize that it may take some time to find a lender to approve you for a mortgage if you have bad credit. But if you stay patient and continue to shop around, you’ll likely find an option that works for you. Many programs and lenders are willing to work with individuals with low credit. You just have to be patient and find the right fit.
Work on Your Credit Score
If you have the time, you can always work on your credit score. There are credit repair programs out there that can help walk you through the process. Or you can be sure to open up new credit accounts and pay them off on time to help raise your score. Paying off as much existing debt as possible can also be helpful. If you have a significant public record like a foreclosure or bankruptcy, you’ll have to wait until enough time has passed for your credit to rebound. But any changes you can make, no matter how small, will increase your chances of approval.
Be Wary of Guaranteed Approval Mortgage Loans
There are mortgages out there that advertise themselves as guaranteed approval, which means that you will be approved no matter your credit score or financial history. Any reputable lender will look at your finances and make a risk assessment as to whether or not they are willing to lend you money. So, anyone who claims that approval is guaranteed is likely trying to trap you into an excessive rate or engage in some other predatory lending practice. There’s no such thing as a guaranteed approval, so any loan that advertises it should be carefully scrutinized.
Make a Larger Down Payment
One surefire way to reduce your risk as a borrower is to make a larger down payment. Maybe you can’t pay cash for the entire property, but you can save 50% and use a mortgage for the rest. In that case, it may be easier to convince a lender to give you a loan compared to if you only had 10 – 20% saved. Or maybe you are right on the cusp of qualifying for a loan but aren’t quite there. Offering to make a 30% down payment might help you plead your case. The more money you offer up front, the less risk the lender has to assume, so try to save as much as possible before you apply for loans.
Buying a house with bad credit isn’t impossible, but it can be challenging. Don’t expect to simply walk into your bank and be approved that afternoon. You may have to get creative and be willing to make certain compromises, depending on how bad your credit is.
Continue to work on your credit as much as possible while you search to increase your chances of approval and show lenders that you’re making an effort. Also, save as much as possible before applying so the lender knows you’re serious. If you are persistent and keep an open mind, you’ll eventually find someone willing to give you a loan.