How to Buy a House With Bad Credit

Buying a home is one of the biggest financial milestones of most people’s lives. However, consumers who have lower credit scores often worry that homeownership is out of reach.

The good news is that it’s still possible to buy a house, even if your credit isn’t perfect. There are actually several mortgage programs designed to help buyers with less-than-ideal credit.

If you’re wondering how to buy a house with bad credit, it will help to understand how lenders evaluate borrowers and what steps you can take to make yourself a more appealing applicant. With a little effort and some consistency, you can boost your score and blaze a path to homeownership.

Here’s how to buy a house with bad credit. 

Can you buy a house with bad credit?

Yes — depending on what you consider “bad.”

A higher credit score will mean better mortgage terms. However, lenders also consider factors like income, employment history, and debt-to-income ratio. The amount you put down also matters. Lenders may be more flexible with their score requirements if you’re able to put more money down. 

There are several government-backed mortgage programs designed specifically to help buyers who may not qualify for conventional loans. These programs could allow you to qualify with a lower credit score. A down-payment assistant can also help reduce your out-of-pocket burden while giving you access to cash to put toward a home. 

What lenders consider “bad credit”

Credit scores range from 300 to 850. In general, a score of 720 and up is considered excellent credit, while scores under 600 are considered poor credit. Everything in between is considered fair or good.

For most mortgage options, you’ll need a score of 620 or higher to qualify. However, FHA loans offer the most flexibility in terms of your score. You may be able to qualify for a standard FHA loan with a score of 580 or higher. There’s also a 10% down FHA loan option for borrowers with scores above 500 but under 580. 

Minimum credit scores for different mortgage types

Mortgage programs vary widely in their credit score requirements. Here are the typical minimum score ranges for common loan types:

• Conventional Loans: 620, though some lenders may be flexible if you put more money down
• FHA Loans: 580 (or 500 with 10% down)
• VA Loans: Many lenders accept scores from 580–620
• USDA Loans: Typically require a score of around 640 or higher

You may find variations between different mortgage companies. That’s why it’s important to compare two or three different options when shopping for a mortgage. 

Why credit scores matter for home loans

Your credit score doesn’t just affect whether you get approved for a loan. It can also influence the following:

• Your mortgage interest rate
• The amount you have to put down
• Loan fees and closing costs
• The types of loans you qualify for 

Borrowers with lower credit scores typically pay higher interest rates. A difference of a single percentage of interest can lead to tens of thousands in extra payments over the life of a loan.

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How to buy a house with bad credit: Step-by-step

You may still be able to qualify for a home loan even if your credit score isn’t as high as you’d like it to be. Here’s how to buy a house with bad credit.

Step 1: Check your credit score and reports

Start by reviewing your credit score and full credit reports from the three major credit bureaus (Equifax, Experian, and TransUnion). You’re allowed one free copy of your report from each bureau every 12 months. Looking over your report will help you understand what lenders see when they evaluate your mortgage application. 

When reviewing your reports, pay particular attention to your current score, records of missed payments, and outstanding credit card balances. If you notice any mistakes, you can file a dispute. Kikoff offers a free dispute-letter-generation tool that you can use to create a letter and send it to the relevant credit bureau. 

Step 2: Understand what you can afford 

Buying a home means more than just paying your principal and interest. You’ll also need to account for:

• Property taxes
• Homeowners insurance
• Maintenance costs
• Utilities
• Closing costs

Your property taxes and homeowners' insurance will be wrapped into your mortgage payment; those other fees you’ll need to consider separately. Some mortgage calculators only list your principal and interest. For a more accurate look, use a calculator that incorporates the other fees into your estimate. 

If you’re looking at homes in a homeowner’s association neighborhood, make sure you factor in HOA fees, which can add a few hundred dollars per month to your payment. 

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Step 3: Save for a down payment

Next, you need to start saving for a down payment. USDA and VA loans have $0 down options, but they tend to require a higher credit score. VA loans have additional eligibility requirements and are only available for service members, veterans, and certain family members.

If you’re exploring how to buy a house with bad credit, you’ll most likely be applying for an FHA or conventional loan. These loans have 3.5% and 3% down options, respectively. However, if you’ll be applying with a lower score, plan on putting more money down.

Making a larger down payment can reduce your risk in your lender’s eyes and bring your monthly mortgage payment down. Aim to save up at least 5%–10% to put down. 

Step 4: Research loan programs for lower credit scores

Not all mortgages have the same requirements. If you know your score is on the lower side, focus on FHA and conventional loans. While most conventional loan programs require a score of 620, some lenders approve borrowers with scores as low as 580. However, they require them to put down more than the standard 3%. 

The best solution is to consider multiple loan options to identify the program that best fits your financial situation. You should talk to at least two to three different lenders. Once one lender runs your credit, there’s a grace period that gives you a window to compare your options.

Step 5: Get pre-approved for a mortgage

If you’re ready to start your home-buying journey, tell your lender you want to apply for pre-approval. They’ll ask you to submit documents like pay stubs, previous tax filings, and employment verification.

During this process, the lender will take a closer look at your:

• Income and employment status
• Credit history
• Debt obligations
• Bank statements and assets

The goal is to determine whether you’re eligible for a mortgage or too much of a risk. If you’re pre-approved, the lender will tell you how much you qualify to borrow and the amount you’ll have to put down. 

Step 6: Work with a real estate agent

An experienced real estate agent can help you navigate the homebuying process and negotiate with sellers. When you find a home you like, your agent will submit an offer on your behalf. 

When working with an agent, provide them with a list of must-have and nice-to-have options. Be realistic based on your budget and focus on identifying neighborhoods where you’d like to live. Your agent will use this information to help you find a suitable home.

While closing on a home usually takes 30–60 days, the actual searching can take longer. Some buyers find a home they like and make an offer right away. Others may look at dozens of homes before moving forward.

Step 7: Close on your home

Once your offer is accepted, the lender will finalize the mortgage through underwriting and appraisal. The title company will handle the closing process by coordinating with your agent, the seller’s agent, and the lender.

Make sure you respond promptly to any requests from the lender for documents. If you delay, it could push back your closing date. After your loan has finished underwriting, you’ll receive a clear-to-close notice.

You’ll need to provide your closing costs and down payment amount when you go to closing. You can then sign your loan documents and take possession of the keys to your new home.

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Mortgage options for buyers with bad credit

If you’re determined to buy a home but don’t have the best credit, here are the primary options you’ll want to consider:

FHA loans

FHA loans are the most common solution for buyers with lower credit scores. Whereas many loan types require a score of 620 or higher, you may be eligible for a 3.5% down FHA loan with a score as low as 580. If you can put 10% down, you may qualify for an FHA loan with a score of 500 or higher. 

While FHA loans are issued by private lenders, they’re backed by the federal government. As a result, lenders view them as lower risk than conventional mortgages, which is why the lending requirements are more flexible.

VA loans

VA loans are available to eligible military service members, veterans, and some surviving spouses. Some of the benefits of VA loans include:

• No required down payment
• Competitive interest rates
• Flexible credit guidelines

On paper, most lenders ask for a score of 620 or higher. However, there are some who may approve applicants with a score of 580 or higher. Still, VA loans are only available to a select group of consumers.

USDA loans

USDA loans help buyers purchase homes in qualifying rural and suburban areas. These loans have no down payment requirements and offer competitive interest rates. The credit standards are flexible, although many lenders require a score of 620 or higher. USDA loans also have income limits and geographic eligibility requirements. 

Non-qualified mortgage (non-QM) loans

Non-QM loans are alternative mortgage products designed for borrowers who don’t meet traditional lending criteria. These loans may be helpful for buyers who have irregular income or higher debt levels. Because they carry more risk for lenders, they often include higher interest rates or shorter repayment periods. 

Ways to improve your credit before buying a house

Now that you know how to buy a house with bad credit, let’s look at some ways to improve your score. A higher credit score may qualify you for a better interest rate, which can translate to major savings both on your monthly payment and over the total life of the loan.

You’ll need to take the following steps if you want to become a more competitive applicant:

Pay down your credit card balances

Your credit utilization rate is one of the biggest factors that impact your credit score. By paying down your credit card balances, you can improve your score and decrease your debt-to-income ratio (DTI). If you have several credit card bills, make the minimum payments on all of them and put extra money toward the card with the lowest balance. 

Make all payments on time

It’s critical to make all of your payments on time. Lenders will want to see that you’re paying back the money you’ve borrowed, and late payments can significantly lower your credit score.

Dispute errors on your credit report

If you find any errors on your credit report, file a dispute with the appropriate credit bureau. Once the error is corrected, your score should improve.

Keep in mind that normal activity can take a month or two to show up on your report. For example, if you pay off a credit card, it may not be reflected on your report until the following month.

Use credit-building tools to improve your payment history

Traditionally, rent and utility payments don’t get reported to the credit bureaus. As a result, you don’t get credit for this on-time payment activity. 

Fortunately, tools like Kikoff make it possible to get credit for these actions. With Kikoff, you can report verified rent payments to Experian. Kikoff also includes other features that put you in control of your financial future, such as a dispute-letter generator and utility payment reporting.

Conclusion

Whether you’re new to building credit or you’re bouncing back after a rough patch, Kikoff can help you strengthen your score with on-time payment reporting. Take a step toward stronger credit habits with Kikoff.