Key Takeout: Yes, you can buy a home with poor credit. Programs such as FHA, VA, USDA loans allow buyers with low credit scores of 500-620 to qualify.
Buying a home can be an exciting yet confusing process. You can also get frustrated when you’re trying to buy a house with a low credit score and don’t know where to point your answer. Many people rent with the dream of going through the home buying process and becoming their first home buyer. But while this dream may feel out of reach for those with low credit scores, there are ways to make it happen whether you’re buying a house in Atlanta or looking at a house for sale in Boston. This Redfin guide shows you what you need to know about how to buy a home with poor credit.
Step 1: Know your credit score
First, get a credit report and find your credit score. Equifax, Experian, and Transunion offer these for free. Depending on your credit score, there may be something to do, and it may take some time to get the credit score you need to buy a home.
Step 2: Explore loan programs for bad credit buyers
FHA loan
FHA loans are one of the most accessible options for buyers with a low 500 credit score, backed by the Federal Housing Administration.
580+ Credit Score: Down by just 3.5% Credit Score 500-579: LTV Ratio that needs to be reduced by 10% is allowed maximum (up to 96.5%)
Example: If you buy a $500,000 home with a 96.5% LTV, you will need a 3.5% down payment ($17,500) and you can borrow up to $482,500.
VA loan
Army veterans with a minimum credit score of 620 have access to a Veterans Affairs Bureau (VA) loan. If you can increase your credit score to qualify, additional VA loan perks include:
USDA loan
USDA loans are available to low-income home buyers considering purchasing in rural areas. The minimum credit score required to obtain a USDA loan is 620.
Private mortgage insurance (PMI) low interest rates that do not require a down payment
Freddie Mac Home Possibility Loan
Possible home loans make it easier for first-time buyers to get a home. Possible homes are available to borrowers with a credit score of 660, with low or medium income borrowers.
A 3% down payment down payment support program is available
Fannie Mae Homely Delone
HomeReady loans can help moderate-income borrowers by expanding mortgage eligibility in low-income communities. HomeReady requires a minimum of 620 credit scores to qualify, and is not exclusive to first-time home buyers.
3% down payment ability to qualify for a loan to use additional income from your roommates
Non-qualified (other than QM) mortgage
These loans may work for people who do not follow traditional lending rules and score 500.
Easier Qualification Processes High interest rates are ideal for self-employed borrowers and those with irregular incomes
Step 3: Improve your chances of being approved
Get pre-approved for your mortgage
One of the first items on your to-do list is getting pre-approval for your mortgage. The previous approach shows which interest rate the lender will let you borrow and are happy with.
Increase your deposit
Lenders are hesitant to lend money to people with low credit scores because of perceived high risk. The easiest way to combat this is to increase your down payment. This will allow more mortgage transactions to be made available.
Avoid applying for new credits
A new credit application will show lenders you that you are financially stretching yourself. When applying for a mortgage, a new financing agreement or loan could act as a red flag.
Make sure you can check all your income
The lender will always want to check your income when you apply for a loan. Be sure to provide your salary and bank statements up to the last 12 months.
Make sure you’re registered to vote
Election role data is an important tool for lenders to verify their identity. You can have a great credit score without registering, but it can prove difficult to approve a mortgage.
Be approved in advance and secure your dream home
Work with your lender to find the right loan for the home you love.
Step 4: Improve your credit score
It’s possible to buy a home with a lower credit score, but increasing it will benefit you in the long run. Focusing on these financial habits, if you are under 580, it will help you increase your credit score.
Improve your payment history Increase your debt-to-income ratio to pay your entire debt for increased debt Reduce your credit use Check your credit report and object to error
FAQs about buying a house with poor trust
What do lenders think of poor credit?
Mortgage lenders and the Federal Housing Administration (FHA) are considering credit score ranges when considering a mortgage. A credit score between 580-669 ranks your credit as “fair” and is considered to be at high risk for mortgage lenders. The lender considers a score below 579 as “bad” credit. This low score can make finding a mortgage difficult, but it’s not impossible.
Your credit score will tell your lender about your spending habits, reliability of your payments, and potential mortgage repayments. A low credit score means that lenders are at high risk, but it doesn’t mean that their dream of owning a home has to end.
Credit score
Bad trust
300 – 579
Fair Credit
580 – 669 Good Credits
670 – 739
Very good trust
740 – 799
Exceptional credits
800 – 850
How much does a bad credit score cost you?
Credit scores represent the level of risk involved when lending money, so a lower score is more expensive to buy a home due to a higher interest rate.
For example, borrowing $500,000 and getting a great credit (780) will allow you to secure an interest rate of around 7% or around $3,382 per month payment. A score of 620 means a 7.8% interest rate, or $3,600 a month. For over 30 years, this amounts to up to several thousand dollars in monthly mortgage payments.
Do you need to focus on improving your credit score before you buy a home?
This is entirely up to you. In the long run, increasing your credit score can save you a lot of money when buying a home. That being said, the housing market is constantly fluctuating and real estate tends to value its value over time. This helps offset borrowing costs with poor credit.
