How to buy a house with bad or low credit
Quick insights
- You can buy a house with bad credit by improving your score, saving for a larger down payment and exploring government-backed loan options for buyers with low credit scores.
- The minimum score to qualify for a home loan varies by lender and loan program, and your credit score is not the only factor mortgage lenders consider.
- Lenders consider credit, income, assets, and down payment size when reviewing mortgage applications.
You still have options to buy a home if your credit is less than perfect. Although your credit profile affects your borrowing power, you may be able to buy a house using certain lenders and loan programs.
Can you buy a house with bad credit?
You may be able to buy a house with a low credit score. However, lenders may see borrowers with bad credit as a higher risk, which could result in a higher interest rate. Having a larger down payment can help mitigate the risk for mortgage lenders. A sizeable down payment reduces the loan-to-value ratio (LTV), making you a less risky borrower. While saving for a larger down payment can help, working to improve your credit score in the months leading up to your home loan application could help you qualify for better loan terms and improve your chances of approval.
In addition, there are government-backed loans available to first-time homebuyers and other prospective homebuyers who may have a bad or low credit score. Examples include Federal Housing Administration (FHA), Veterans Affairs (VA) and United States Department of Agriculture (USDA) mortgage loans. Chase does not offer USDA loans.
What is the minimum credit score needed to buy a house?
A credit score below 620 is generally considered low when qualifying for a conventional mortgage, although definitions can vary by loan provider. However, what constitutes a bad credit score can vary slightly depending on the type of loan and the specific lender’s criteria. Additionally, lenders assess income, employment stability, and debt-to-income ratio to determine loan repayment ability, which can influence approval decisions even when credit scores are lower.
Beyond your credit score, mortgage providers also consider your credit history (including payment history), total debt balances and the length of your credit accounts.
Minimum credit score requirements by loan type
- Conventional loan: Typically 620 or higher, depending on the loan program and mortgage provider.
- FHA loan: 580 (or 500 with a minimum 10% down payment).
- VA loan: There is no official minimum credit score for VA loans, but most mortgage lenders require a FICO score of at least 620.
- USDA loan: There is no official minimum credit score for USDA loans, but most mortgage lenders require a FICO score of at least 620. Chase does not offer USDA loans at this time.
How to buy a house with bad credit
Here’s a guide that could help you navigate the process of getting a mortgage if you believe your score is below the common minimum requirements:
- Obtain your credit report: Get a copy of your credit report from all three major credit bureaus. Correct any inaccuracies in your credit report by disputing them with the credit bureaus.
- Make debt payments: Focus on reducing high credit card balances and paying off outstanding debts to improve your credit score. Ensure all bills and existing loans are paid on time to build a positive payment history.
- Increase savings: Budget wisely by setting aside funds specifically for your down payment to strengthen your mortgage loan application. Having a larger down payment reduces your LTV ratio, which can make you less risky to loan providers.
- Consider alternative options: Look into FHA loans, which have lower credit score requirements (generally a minimum score of 580 for a 3.5% down payment). You can explore VA loans, which have no minimum credit score requirement, but lenders generally prefer a score of 620 or higher.
- Explore lenders that work with lower credit scores: Some loan providers specialize in working with borrowers who have lower credit scores or unique credit histories. Research lenders who are known for their flexible credit policies. Get quotes from multiple lenders to compare terms and interest rates.
- Consider a co-signer: A co-signer with good credit can help improve your chances of approval and potentially secure better terms. Ensure the co-signer understands their financial responsibility.
- Prepare for higher costs: Higher interest rates and additional fees may apply if you qualify for a mortgage loan, depending on your credit score. Adjust your budget for buying a house to accommodate potential higher costs.
Home loans for bad credit
If you have a lower credit score, you may not qualify for a conventional mortgage loan. Although this depends on the lender and your other financial information, one of these mortgage options may be worth considering.
FHA loans
The minimum down payment for an FHA loan is 3.5% of the purchase price. The credit score and down payment required to qualify for an FHA loan vary by lender. A score of at least 500 may qualify for an FHA loan, depending on the mortgage provider and the size of the down payment. The FHA does not offer loans if your score is less than 500, but if you do not have an established score, you may still be able to qualify for the 3.5% down payment depending on your credit.
To help offset the risk that borrowers with low credit scores can bring, FHA loans require an upfront mortgage insurance premium (UFMIP). The upfront MIP is 1.75% of the loan amount, while the annual MIP is between 0.15% and 0.75% of the average remaining mortgage balance and is included with your monthly mortgage payment.
VA loans
If you’re an active-duty, separated, retired and/or disabled member of the military, including the National Guard or Reserves, you could qualify for a VA loan. VA loans generally don’t require a down payment.
Like FHA loans, VA loans come with additional fees. Most borrowers must pay a one-time funding fee, between 1.25% and 3.3% of the loan amount. Check with your HLA for up-to-date information. Borrowers who make larger down payments and who are applying for their first VA loan typically pay the lowest funding fees.
Grant programs
Many state, county and city government agencies offer grants, vouchers and other assistance programs to assist borrowers with lower credit scores or limited savings. Check for local mortgage grants and housing assistance programs in your area.
What other factors do lenders review?
Your credit score is an important part of your loan application, but it isn’t the only factor that lenders consider. They also review:
- Income and debts: Most conventional lenders require a debt-to-income (DTI) ratio of 43% or less. To determine your DTI, lenders divide your mortgage payment and recurring monthly debts by your monthly pretax income.
- Down payment: The larger your down payment, the better chance a lender will consider your application. While there are low down payment options, at least a 20% down payment will also help you avoid paying private mortgage insurance on conventional loans. You can calculate this percentage by dividing your down payment by the lesser of the appraised value or purchase price.
- Assets: In some cases, lenders require you to have assets in reserve after closing on your loan so you can continue making your monthly mortgage payments. Most bank accounts, stocks and bonds count as assets.
- Work history: Most lenders prefer borrowers with steady employment. They may require you to have been in your current job or in your current job field for at least two years.
What to consider when buying a house with bad credit
If you do apply for a home loan with a lower credit score, make sure you consider these factors:
- Applying for a mortgage typically will not permanently damage your credit score. A home loan application shows a hard credit pull on your credit report. This credit pull may affect your credit score.
- You may be able to lock in a lower interest rate if market conditions are favorable. If you want to buy a house when interest rates are particularly low, acting sooner rather than later may be a smart idea. Waiting longer to apply could mean getting a loan when interest rates and monthly payments are higher.
- You may need a large down payment. To offset your credit score, lenders may require compensating factors, such as a down payment of 20% or more of the purchase price.
- Your lender may have stricter income or asset requirements. To make up for a low credit score, your lender may require a lower DTI ratio or significant assets in reserve.
- You may end up spending more. Loan options you qualify for may require upfront or annual payments, which can increase the cost of buying a house.
In summary
Securing a home loan with poor credit may seem challenging, but it’s achievable with the right strategies and determination. By focusing on improving your credit, saving for a larger down payment and exploring alternative loan options, you can enhance your chances of approval. Remember, there are lenders that specialize in bad credit home loans and offer mortgage loans to borrowers with poor credit.
Working with a Home Lending Advisor can provide valuable support and help you streamline the path to homeownership, turning your dream of owning a home into a reality.
