Can You Buy a Home With Bad Credit?
November 4, 2021
Having bad credit doesn’t necessarily inhibit you from buying a house. It just makes the goal of buying a house a little more difficult to achieve. However, with a little more research into your financing options, you can buy a house just like you envisioned. In this blog post, you’ll learn how to understand credit score as well as the types of loans available for those with bad credit.
What Is A Bad Credit Score?
Credit scores are determined by the Fair Isaac Corporation otherwise known as FICO scores. FICO scores have become the industry standard for assessing someone’s credit risk when lending.
Credit scores are used by lenders to predict the likelihood that a borrower will fall behind on their loan obligations. Having a good credit score means that you are less likely to default on your loan in the eyes of lenders.
Anything above a 670 FICO score is considered a good credit score. A score from 669 and 580 is considered fair, while anything between 579 and 300 is regarded as poor.
Mortgage lenders are free to set credit requirements independently as they please. Many lenders don’t even have a specific minimum credit score requirement on their loans. When offering a loan, such lenders tend to focus on factors like:
- Your income
- Your overall amount of debt
- The money you have available for the down payment
You may be able to find a lender that will offer you a mortgage loan even with a bad credit score. Although, you should expect the interest rates on the mortgage loans to be much higher than on conventional loans.
Mortgage Options When Buying a Home With Bad Credit
Using cash is one of the best methods to buy a house with bad credit. You can still qualify for loans with bad credit but the loans you will qualify for are likely to give you a lower than ideal amount. Buying a house with cash helps you cover the difference between the purchase price of the house and the loan amount you received.
1. Conventional Loans
There are two types of conventional loans, conforming and non-conforming.
Conforming loans meet the limits set by the Federal Housing Finance Agency (FHFA). The loans also meet the funding criteria for Freddie Mac and Fannie Mae, Government Sponsored Enterprises. You must have a credit score of 620 or higher to qualify for a conforming loan.
If a mortgage loan does not meet the guidelines of government sponsored entities like Freddie Mac and Fannie Mae, it falls under the category of non-conforming loan. To qualify for a non-coforming loan, your credit score must be at 580 or above.
Although conforming loans do offer a low interest rate and have a lower down payment requirement, they also come with a maximum limit. If you are looking to buy an expensive house or a house in a high-cost area, you may need to borrow more money than is offered with a conforming loan. Whereas the limits of a non-conforming loan vary by the lender and the program, making them a better option in the above scenario.
2. FHA Loans
An FHA loan is backed by the Federal Housing Administration and have a comparatively less strict qualifying requirements. They are very appealing to those with bad credit or for first-time house buyers.
The minimum credit score requirement to qualify for an FHA loan is 500. However, there are other requirements that you must meet to get an FHA loan. The most important requirement being the house you are buying must be your primary residence.
You can check the detailed list of requirements for FHA loans here.
3. USDA Loans
If you are looking to buy a house in a rural area, you may be qualified for a USDA loan. USDA loans are offered by the U.S. Department of Agriculture. One of the most convenient things about a USDA loan is that there is no down payment. However in order to be eligible for most USDA loans, your household income has to meet certain requirements which can be found here. The minimum credit score required to qualify for a USDA loan is 640.
4. VA loans
VA loans are offered by the U.S. Department of Veteran Affairs to citizens who are serving in the army, have served in the past, or their surviving spouses. VA loans aren’t offered to anyone who served in the military. There are minimum service requirements that you or a loved one has to meet to qualify for VA loans. VA loans also have zero down payment, but you may still have to pay a certain amount of funding fees to the lender. Typically, lenders require you to have a minimum credit score of 620 to qualify for a VA loan.
Learn more about the service requirements and eligibility for VA loans here.
What If You Cannot Get A Bad Credit Mortgage?
As you can see, there are many different mortgage options available for those with bad credit scores, depending on how low your credit score is. But, if you fail to qualify for any of these loans, all hope is not lost. You can still repair your bad credit. After all, a higher credit score will qualify you for more mortgage options and will save you thousands of dollars in interest.
How To Improve Your Credit Score
Below are steps to take and the valuable information to know about what can affect your credit score and how you can raise it over time.
- Start paying bills on time – Your payment history accounts for 35% of your credit score. This is the reason why paying bills on time is the best way to boost your credit score.
- Manage your credit utilization – The more credit you are using, the higher your credit utilization will be. Keeping your credit utilization below 30% will prevent your credit score from being affected.
- Credit mix – There are different types of credits considered in a credit report, which includes credit cards, installments (personal loans, car loans, student loans) etc. Having a diverse amount of loans and payments will benefit your credit score in a major way.
- The average age of accounts – Age of your account means how long your account has been reported open. Generally, the longer an account has been open and active, the better it is for your credit score. The credit score algorithm takes into account the age of all your open and active accounts to calculate the average age, which makes 15% of your credit score.
- New credit – Be mindful when applying for new credit. Whenever you add a new credit line, it decreases the average age of accounts, which negatively affects credit scores.
Buying a Home With Bad Credit Is Not Impossible
Having a low credit score does not mean that you can’t buy a house. It only means that you will have to work a little harder to find the right mortgage option for you. Now that you have an idea of the various mortgage options and the requirements needed to qualify for them, you can plan your home buying journey accordingly.