Navigating the home buying process can be overwhelming, even under the most ideal conditions. Throw an obstacle into the equation, such as bad credit, and it can feel as if buying a home just isn’t in the cards for you.

While it’s true that buying a house with bad credit is more difficult than it would be otherwise, it’s very much possible.

Don’t allow a low credit score to stand between you and your dream home. By understanding your credit score and how to improve it, as well as how the mortgage qualification process works, you’ll be on the road toward becoming a homeowner in no time.

To learn how to buy a home with a low credit score, just keep reading! 

What is Bad Credit?

Did you know that most lenders don’t have a set minimum credit score for buying a house? But here’s the thing. Each mortgage lender is free to set its own standards for lending.

Government-backed loans, such as FHA loans, typically come with a lower credit requirement, but they still require certain standards to be met.

The credit scoring model most often used by lenders has a range of 300-850. Anything below 670 is considered bad credit.

Unfortunately, if your credit score is 499 or lower, you’re going to need to improve it before you’ll be considered for a home loan.

Buying a House With Bad Credit

Bad credit doesn’t necessarily signify a bad financial situation, and lenders know that. So instead of focusing only on your credit score, they’re going to dig a little deeper into your finances.

When you apply for a home loan, lenders will take the following into consideration:

  • Your house down payment
  • Your overall amount of debt
  • Your income
  • Any debts in collections

The more cash you have on hand, the easier it will be to get a loan. Why? Because the higher your down payment, the lower the actual mortgage loan will be, making more options available to you.

Let’s say, for example, that you only qualify for a $200,000 loan with your current credit score, but your dream home is $300,000. If you have $100,000 on hand to use a down payment, you’re good to go!

It’s important to remember, however, that the lower your credit score, the higher your interest rates will be. Your mortgage payment will be higher than it would be otherwise.

That said, don’t feel that you’re stuck with choosing from the cheap houses for sale. You can always repair your credit and refinance your mortgage in the future for improved loan terms.

Average Credit Score Requirements

When you want to buy a home, there are four main loan options available: conventional, FHA, VA, and USDA. Each of them comes with its own home mortgage requirements, and some are friendlier to those with a low credit score than others.

As we mentioned, there’s technically no minimum credit score to qualify for a conventional loan. However, lenders offering this type of loan will often require a credit score of 620 or higher.

If your credit score is at least 500, you can get an FHA loan, insured by the Federal Housing Administration. This is a popular choice for first-time buyers, as the requirements are much lower than a conventional loan.

VA loans are reserved for veterans and those currently serving in the military. This type of loan is backed by the Department of Veterans Affairs and doesn’t require a down payment. The home must meet specific standards, and you typically need a credit score of at least 580 to qualify.

Last are USDA loans, another government-backed option. This one is backed by the Department of Agriculture and is for those buying a qualifying home in a rural area. There’s no down payment required; however, you need at least a 640 credit score.

Repairing Your Credit Score

Having bad credit can be frustrating, but improving your credit score might not be as difficult as you think.

The first step is to look at your entire credit report, not just the score. There might be errors dragging down your score – one small collection can lower your score by 100 points! If you find any inaccuracies or debts that need to be updated, you can dispute them with either the credit bureau or the creditor.

Next, do what you can to clean up your credit history. Make payments on time and pay off any debts you can, including your credit cards.

The amount of credit you’re using is known as your credit utilization and can have a major impact on your overall score. For the best results, keep your credit utilization below 30%.

This means, for example, that if you have an available credit line of $2,500, you never carry a balance of more than $750 into the next month.

Once you’ve improved your credit a little, you can apply to increase your available line of credit. This will make that 30% value higher, making it easier to keep your credit score healthy.

Don’t Allow Bad Credit to Ruin Your Dreams

Like it or not, the world runs on credit. The higher your credit score, the easier it is to make big purchases such as a house or a car. However, that doesn’t mean that you can’t buy a house with bad credit!

While buying a house with bad credit might take a little more time and effort, it’s not impossible. And if you work toward improving your credit, you could qualify to buy a home you never thought possible.

What else can you do to make the home buying process easier? We’re glad you asked! To learn everything you need to know about buying a home, take a look at our blog!