How to Buy a House With Bad Credit

Everybody makes mistakes, but a low credit score shouldn’t cost you your dreams of homeownership.

Even if your credit history prevents you from securing a traditional mortgage, there are many loan programs available for those with less-than-stellar credit. Here’s how to buy a house with bad credit, along with some tips to improve your credit score for the future.

What Is a Bad Credit Score?

Your credit score is a three-digit number that reflects your history of on-time bill payments, unpaid debt, and available credit. Your FICO score — named for the Fair Isaac Corporation — will range from 300 to 850, with higher numbers reflecting good credit.

According to Experian, “bad” credit is any score below 580, though the scores can be broken down as follows:

  • Exceptional: 800-850
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 300-579
A family laughing

Not sure where you fall on this list? It may be time to check your credit.

Each of the three major credit bureaus (Experian, Equifax, and TransUnion) will provide you with a free annual credit report. Checking your report once per year will not affect your score, and it can show you what you need to work on in the future.

What Is the Lowest Credit Score to Buy a House?

Can you buy a home with bad credit? Absolutely, though your spending power and other factors will depend on your lender and loan program.

Most lenders expect a credit score of at least 620 for a conventional mortgage, but you can secure an FHA loan with a credit score as low as 500. Keep in mind, though, that the best interest rates and loan terms will still go to those with strong credit.

Why do credit scores matter so much? Mortgage lenders are looking for borrowers who can be expected to repay their loans in full. The lower your credit, the more risk the lender takes on by loaning you money. A higher interest rate is designed to mitigate that risk.

Still, it’s possible to purchase a house with bad credit, even if you’ve made some mistakes in the past. You’ll just need to find a lender who offers the right loan program for your needs and budget.

Loan Programs

CCM offers a broad selection of home financing products to make sure there is a solution for every lifestyle and personal situation.


Credit Scores for Mortgage Loan Types

The actual credit score requirements vary based on the mortgage loan type. Here are some of the most common types of mortgage loans, along with their credit requirements.

Conventional Loan Minimum Credit Score

Conventional loans (also called “traditional loans”) offer some of the best terms and interest rates. However, to qualify, you’ll typically need at least a 620 credit score.

With that being said, some lenders can help you buy a home if your score is lower than that. You can improve your chances by offering a higher down payment, for example, or by taking out a loan that’s significantly smaller than your loan amount.

Of course, buying a house with bad credit usually means a higher interest rate. While most buyers prefer a conventional loan due to its favorable rates and terms, buyers with weak credit may want to consider other loan options that offer a balance between eligibility requirements and loan terms.

USDA Loan Minimum Credit Score

USDA loans are backed by the U.S. Department of Agriculture. Depending on the lender, you may need a credit score of 640 or better, though this can vary depending on other economic factors.

The advantage of USDA loans is that they don’t require any down payment or private mortgage insurance (PMI) payments. There is a required USDA loan guarantee fee that is 1% of the loan amount. The catch is that qualifying homes must be located in approved rural or suburban areas.

FHA Loan Minimum Credit Score

FHA loans are backed by the Federal Housing Administration (FHA) and can be ideal for those with less-than-stellar credit. An FHA loan can even be used with a 500 credit score, though some specific rates, down payment, and terms come into play.

For instance, if your credit score is 500-580, you’ll need to make at least a 10% down payment to secure an FHA loan; however, if your credit score is 580 or above, you can put down as little as 3.5%.

Just be aware that with FHA loans, you’ll have to pay for mortgage insurance premium (MIP), which will be rolled into your monthly mortgage premiums.

VA Loan Minimum Credit Score

Backed by the Department of Veterans Affairs, VA loans are ideal for those looking for a home loan with no down payment requirement.

These loans are offered through private lenders, which means you might face credit score requirements.

As long as you’re a current or former member of the U.S. Military (or the spouse of one), you may be eligible for a VA loan with no down payment or PMI payments but there is a funding fee.

What Happens if You Can’t Qualify for a Mortgage Loan?

Don’t get discouraged if you don’t qualify for the first mortgage you apply for — buying a house with bad credit may take persistence and resourcefulness. If your credit score is below 600, you might want to look into specialized loan programs such as VA loans or FHA loans.

If your credit score is under 500, you may need to take some time to improve it before you’re financially ready to buy a home. While it’s never pleasant to see your dreams delayed, the good news is you’ll have more time to save for a down payment, which can improve your chances when buying a house with bad credit.

How to Improve Your Credit Score

Before you buy a house, you might want to check your credit score with at least one of the three major credit bureaus: Equifax, Experian, or TransUnion. This will at least let you know what kind of loan program you qualify for or show you areas where you can improve.

Improving your credit can take time, but it’s worth it. Here are some common ways to boost your credit and increase your chances of qualifying for a home loan.

Check for Errors

The fastest way to improve your credit is to check your credit report for errors.

Removing an error from your credit history can improve your score dramatically, though it can take a few months to take full effect. That’s why it’s smart to check for errors regularly so you can correct them right away.

Pay Your Bills on Time

Your payment history has a major impact on your credit score. Make it a point to pay your bills on time to avoid dings on your credit score. Automated payments and electronic reminders can ensure that you keep up with your payments and improve your score over time.

Keep an Eye on Your Available Credit

Even though you may be below your credit limit, your credit card balance can still lower your credit score. This is known as your “credit utilization ratio.” Once you exceed 25-30%, you can expect to see a dip in your credit.

For example, if you have a credit limit of $5,000, you’ll need to keep your balance below $1,500 to avoid hurting your credit.

Increase Your Credit Mix

Having multiple types of credit can improve your score. Paying both credit cards and car loans, for example, improves your credit mix, which accounts for 10% of your overall credit score.

Avoid Hard Credit Inquiries

When you apply for certain types of loans, the lender will perform a hard credit pull. Each time this happens, it can lower your overall credit score. Unfortunately, this is unavoidable when you’re seeking pre-approval on a mortgage. But by minimizing the total number of hard credit checks, you can avoid reductions in your credit.


For this and related information, please visit CrossCountry Mortgage

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