How to buy a house with bad credit

Your credit score is the first factor mortgage lenders consider when determining whether you’re eligible for a loan. In general, a good to excellent credit score translates to more loan options and a better mortgage interest rate. However, you might still be able to buy a house with a lower credit score. Here’s how.

Can you buy a house with bad credit?

Yes, you can buy a house with bad credit. There are several mortgage programs that allow for lower credit scores, including conventional (the most popular loan type) and FHA loans.

The typical mortgage borrower, though, has very good credit. As of the third quarter of 2024, two-thirds of newly originated mortgages went to borrowers who had credit scores higher than 760, according to the Federal Reserve Bank of New York.

Mortgage lenders reserve their best rates for borrowers with credit scores of 740 or higher — considered “very good” by FICO scoring standards.

How do mortgage lenders evaluate credit?

Lenders rely on data from the three main credit reporting bureaus, Equifax, Experian and TransUnion. Typically, your lender will look at the middle credit score of the three when considering you for a mortgage. In addition to your scores, your lender will look at your credit report, including total debt and any issues like defaults or late payments.

What do mortgage lenders consider a low credit score?

Your credit score isn’t the only factor in your mortgage approval odds, but it’s a key indicator of your risk as a borrower. Mortgage lenders most often use the FICO credit scoring model to assess creditworthiness. Here’s how those ratings work:

How to get a mortgage with bad credit

You can get a mortgage with a lower or bad credit score, but you’ll still need to financially prepare to make sure you get the best possible loan terms. Your preparations should include working to improve your credit score before applying, as this will increase your approval odds and put you in the best spot to secure a competitive interest rate. Here are some steps to take:

1. Check your credit report for errors

Checking your credit report for errors can help identify any items that may be lowering your credit score. If you see a mistake or outdated item, contact Equifax, Experian or TransUnion. Each credit bureau has a process for correcting errors and out-of-date information.

2. Pay down or pay off debt

When working toward buying a home with bad credit, try to pay down what you already owe. Lowering your debt load might not only boost your credit score, but also make you eligible for a bigger mortgage, thanks to a better debt-to-income (DTI) ratio.

3. Shop around

Every mortgage lender is different, and some offer lower rates and fees than others. Research shows that getting multiple rate quotes can save you thousands over a 30-year mortgage. Check out different types of lenders, including banks and online lenders, to see where you get the best offer.

4. Find a co-signer

If you have bad credit, consider asking a family member or friend with better credit to co-sign your mortgage. This can help give your application a boost — but only if the co-signer is able and willing to take on the debt. (Note that co-signing is different from co-borrowing.)

5. Avoid too-good-to-be-true loans

If you see ads promising “guaranteed” approval for a mortgage regardless of credit, it’s a red flag. Under federal rules, a lender must verify the ability of a borrower to repay a mortgage, so there can’t be a “guarantee” unless that happens. Even if you get that guaranteed approval, it usually comes with excessive or inflated costs.

6. Consider a rapid rescore

Credit report changes can take time to go through the system, so improved scores might not show up in time for a mortgage application. In this case, you can try getting a rapid rescore through your lender. In this process, your lender submits proof to a credit agency that an applicant has made recent changes or updates to their account that are not yet reflected on their credit report. You’ll need to pay for this service, but the expense might be a worthwhile tradeoff to get a better interest rate.

Types of bad credit home loans

Conventional loans

Fannie Mae and Freddie Mac each back conventional loans with a lower minimum credit score of 620 and 660, respectively. Both of these loans require just 3 percent down and may offer either a fixed or variable interest rate. Conventional mortgages, however, may have stricter qualification criteria than other types of mortgages, such as FHA or VA loans.

FHA loans

The Federal Housing Administration (FHA) insures FHA loans, which allows mortgage lenders to accept a credit score as low as 580 with a 3.5 percent down payment, or 500 with a 10 percent down payment. While FHA loans have more lenient qualifying criteria, they come with mortgage insurance premiums (upfront and annual) that you’ll need to pay no matter your down payment size.

VA loans

If you’re a military member, veteran or married to someone who has served in the armed forces, you could benefit from a VA loan backed by the U.S. Department of Veterans Affairs. You don’t have to meet a specific credit score minimum to qualify, although many lenders do require at least 620. No down payment is necessary for a VA loan, but you’ll need to pay a funding fee.

USDA loans

If you have a lower income and want to buy a home in a particular rural area, look into a USDA loan. While not a hard-and-fast rule, most USDA-approved lenders require a minimum credit score of just 640. Like VA loans, USDA loans come with no down payment requirement.

How much will a low credit score cost you?

A poor credit score will primarily cost you in the way of a higher interest rate. Here’s an example assuming a 30-year conventional loan for $400,000:

FAQ

• Will you pay more for mortgage insurance with bad credit?

  It depends on the type of mortgage. Private mortgage insurers — which offer mortgage insurance for conventional loans, known as PMI — base their rates on credit score, among other factors. Generally, if you have a lower credit score, you’ll pay more for PMI. On the other hand, if you’re getting an FHA loan, your credit score won’t impact how much mortgage insurance you pay — those rates depend on the loan term, loan amount and the size of your down payment.

• Are mortgage rates higher with bad credit?

  Yes. Generally, if you don’t have good credit, that’s a sign you’re a riskier borrower. To compensate for taking on that risk, your lender will charge you a higher interest rate.