How to buy a house with bad credit: Your best options in 2024

For most people, buying a house is the most significant financial investment they ever make. For some, qualifying for a mortgage with favorable rates is a painless process. But for the nearly one-third of Americans with bad credit¹, it’s a bit more of a slog.

It might seem impossible to figure out how to buy a house with bad credit, but lenders have shown increasing favor to applicants with low scores in recent years². And although the average score and the cost of loans are rising³, you can still qualify for a mortgage with a low credit score. However, the process of hunting for your perfect home may just play out differently than for buyers with good credit.

Key takeaways

• A bad credit score is anything below 670, while a poor credit score is anything below 580. You’ll generally need a credit score above 580 to qualify for a mortgage, but options for those with lower scores exist.
• Conventional, FHA, VA, and USDA loans have options for people with bad credit scores. If you have a poor credit score, you may be able to qualify for options from Fannie Mae or Freddie Mac.
• If you don’t qualify for a bad credit mortgage, you can try to increase your score, add more to your down payment, lower your debt-to-income ratio, pay to delete collections, or find a co-signer for your loan.

What is a bad credit score? Defining the minimum credit score to buy a house

A bad credit score is anything below 670⁴. To break this down further, a fair score is 580 to 669, while a poor score is 300 to 579. In real estate, you may struggle to find a mortgage if your credit score is below 580. According to Ashwin Dayal, manager of Orchard Mortgage:

“You can absolutely buy a home with bad credit. You’ll generally need a score higher than 580, but there are options for those with lower scores.”

Despite this, conventional lenders are free to set their own credit score requirements. Since no two applicants are the same, you may find a low credit score doesn’t preclude you from getting a mortgage loan. Which market you buy in and whether you buy a house online or in-person might also change which loans are available to you.

Outside of your credit score, lenders also look at a borrower’s:

• Potential down payment
• Overall amount of debt
• Gross income
• Debts in collections

Any lender who approves a mortgage for a borrower with subprime credit will likely set an enormous interest rate and strict repayment terms. Dayal notes why:

“The reason that bad credit tends to make homebuying pricier is that lenders see a lower credit score borrower as riskier and more likely to default. The lender needs to be compensated by a higher interest rate to cover that risk.”

Tip: Cash is a huge asset when applying for a loan, and if you have enough for a substantial down payment — or a good, steady income — it may be enough to offset a bad credit score. Plus, you can also refinance your loan if your credit improves later.

Government-backed loans, however, do have minimum requirements and different rules depending on your credit score.

6 ways to buy a house with bad credit

Reviewing all your options is key to finding the best mortgage with a low credit score. Plus, even if these six loans aren’t right for you, we’ll touch on other solutions further down.

1. Conventional loans

Minimum credit score: 620

Since lenders set their own minimums for income, credit score, and other factors to qualify for different loans, you should shop around if your credit score is below 620. However, Dayal says these loans can get expensive:

“Every 20 points your credit score goes down, the cost of your loan will typically go up by roughly 0.25% of the loan amount. On a $400K loan, this is $1,000.”

You may be able to find a loan that isn’t too punitive with interest rates, especially if you have a high income relative to your desired loan amount.

2. FHA loans

Minimum credit score: 500

FHA loans have backing from the Federal Housing Administration and tend to have lower qualifying requirements. The minimum credit score to qualify for an FHA loan is 500, but the minimums differ based on the product you’re pursuing. Dayal explains how FHA costs can change:

“Your costs will typically be the same irrelevant of credit, but FHA loans require paying a Mortgage Insurance Premium that may make the monthly payment higher than a conventional loan. If your credit score is below 550, then FHA loans will typically have an extra cost equal to about 1% of the loan amount, or $4,000 on a $400K loan. This can be offset by taking a roughly 0.25% higher rate.”

One other thing to keep in mind: If your credit score is less than 580, you’ll need to make a 10% minimum down payment to secure your loan. If it’s more than 580, you only need a 3.5% down payment.

Generally, to get maximum financing on a primary home purchase, you should have a credit score of 580 or better. Credit scores ranging from 500 to 579 qualify for a little less financing. However, the FHA makes allowances for loan applicants with a “non-traditional credit history or insufficient credit” if they meet certain requirements⁵.

3. VA loans

Minimum credit score: 620

VA loans are for veterans and active service members and are backed by the Department of Veterans Affairs. These loans allow you to buy a house with no money down and bad credit so long as you meet the specific standards to apply. However, like most conventional loans, you need a minimum credit score of 620.

4. USDA loans

Minimum credit score: 640

USDA loans let you buy a home in a qualifying rural area with a $0 down payment. They are backed by the U.S. Department of Agriculture. Most lenders require a 640 minimum credit score to qualify for the loan, however.

5. Fannie Mae HomeReady® loans

Minimum credit score: None

If you don’t have a credit score, you may be able to qualify for mortgage provider Fannie Mae’s special HomeReady® loan. You can use alternative credit sources like bill payment history to demonstrate your capability to pay back the loan. That said, if you put down less than 20% as a down payment, you’ll need to pay for private mortgage insurance (PMI).

6. Freddie Mac Home Possible® loans

Minimum credit score: None

Fannie Mae competitor Freddie Mac also offers loans to borrowers without credit scores or with very low credit scores. If you don’t have a credit score at all, you must make a 5% minimum down payment; otherwise, the minimum is 3%. Like HomeReady® loans, you’ll need to pay PMI if your down payment is less than 20%.

No bad credit mortgage? Try these 5 options

If you have a score of 500 or below, you’re going to really struggle to find a mortgage, even with help from government-backed programs. So what do you do if you can’t find a mortgage?

1. Increase your credit score

The best thing to do to increase your chances of mortgage approval with bad credit is just to improve your credit score. Your credit score takes into account:

• Your history of paying your bills on time, in full
• The amount of credit you’re using. The more credit you use, the lower your credit score may become
• The average age of your credit accounts
• Your credit mix between revolving credit (like credit cards) and installment loans (like car loans)
• The amount of new credit you have

Increasing your credit score is a function of leveraging all of these tools. One of the best ways to improve your score may sound counterintuitive: increasing your available credit. You can do this by paying down balances or requesting a limit increase from your credit card company. By increasing the credit limit without changing your spending habits, you decrease your credit utilization while continuing to pay your statement off on time.

Another thing you can do is open new lines of credit, so long as you can do it responsibly. Taking out a small personal loan or leasing a car before applying for a home loan adds some diversity to your credit mix and gives you a strong payment history. It will take a little time to reflect on your credit score — but if your score is under 500, you shouldn’t rush into buying a house anyway.

2. Use a larger down payment

If possible, increasing your down payment is a surefire way to give yourself a better shot at mortgage approval. Of course, that’s easier said than done. But if you can earn some extra money from a side hustle, get financial help from a family member, or benefit from an inheritance, you may soon have more cash for a down payment.

Otherwise, budgeting wisely and finding ways to cut expenses will help you free up cash. Also, consider putting lump sums like tax refunds or bonuses toward your down payment.

3. Lower your debt-to-income (DTI) ratio

Your debt-to-income ratio (DTI) is one of the most important factors that lenders take into consideration before approving a loan. If your credit score is bad, a better DTI could help your chances of approval.

DTI is your total debt, including your mortgage payment, divided by your gross monthly income. Most lenders will not approve a loan for an applicant with a DTI greater than 45%, though this varies. So, if your credit is bad and you can’t bring in more income with a side hustle, try to pay down some debt.

4. Pay to delete collections

Collections show lenders that you owe money and have not attempted to pay it back. When creditors forward debt to collections, it can damage your score for up to seven years from the date your account became delinquent⁶.

Even if you’ve paid a collection, it can still remain on your report as a “Paid” collection. You can, however, request to remove the collection from your credit report. It’ll cost you some money, but the resulting credit score increase may justify the cost.

5. Find a co-signer

Finally, you might qualify for a home loan with a co-signer with a better credit score, depending on the mortgage. A co-signer with good credit and a better DTI may give you the bump you need to get over minimums. If you’re home shopping with a partner or friend, you’ll need their approval to co-sign on the loan, but it could be the perfect resolution for your issue.

Don’t let a score stop you from selling and buying a new home

Buying a home with poor credit isn’t impossible. If you have a low score, you may still qualify for several loans. Bad credit loans can be expensive, so you probably shouldn’t be in a rush to move in unless your savings are robust. Take some time to increase your credit score, pay down debts, and, if you can, save up.

Sources:

1. “Fewer Subprime Consumers Across U.S. in 2021.” Stolba, Stefan Lembo. Accessed on 15 February 2023 at https://www.experian.com/blogs/ask-experian/research/subprime-study/
2. “Borrower Risk Profiles.” Accessed on 15 February 2023 at https://www.consumerfinance.gov/data-research/consumer-credit-trends/mortgages/borrower-risk-profiles/
3. “Office of Research blog: Credit score transitions during the COVID-19 pandemic.” Brown, Alyssa and McAlister, Siobhán. Accessed on 15 February 2023 at https://www.consumerfinance.gov/about-us/blog/office-of-research-blog-credit-score-transitions-during-the-covid-19-pandemic/
4. “How to “Fix” a Bad Credit Score.” McGurran, Brianna. Accessed on 16 February 2023 at https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/how-to-fix-a-bad-credit-score/
5. “FHA Requirements.” Accessed on 16 February 2023 from https://www.fha.com/define/fha-requirements
6. “Collections on Your Credit Report.” Accessed on 15 February 2023 from https://www.experian.com/blogs/ask-experian/credit-education/report-basics/how-and-when-collections-are-removed-from-a-credit-report/