In the last two decades, only half, or more specifically, 53.02% of the US population have had their mortgage applications approved. This means about half of them are denied a mortgage. And 53% are rejected primarily because of their low credit scores. Did they give up on their dream of owning a home?
The answer is a resounding NO! So, you shouldn’t either.
In 2024, a low credit score doesn’t bar you from buying your dream home. The key is to find a lender who offers favorable mortgage terms.
How to Buy a House With Bad Credit in 5 Easy Steps
Here are 5 steps to help you buy a house with bad credit in 2024:
Step 1: Analyze Your Credit Score
Take a look at your credit score before applying for a mortgage:
- Get Your Credit Reports: You can request a free copy of your reports once a year from AnnualCreditReport.com.
- Review Your Credit Reports: Examine each credit report for errors or inaccuracies. Check for late payments, defaults, or negative marks that impact your credit score.
- Dispute Errors and Inaccuracies: To rectify errors on your credit report, dispute them with your credit bureau. Request deletion or correction of inaccuracies and provide evidence to support your claim.
Step 2: Explore Bad Credit Mortgage Loan Options
Certain loans don’t have the flexibility to accommodate a bad credit score. However, here are some alternative options to help you with your poor credit:
| Loan Program | Minimum Credit Score |
|---|---|
| Conventional Loans | 620 |
| FHA Loans | 500 - 580 (Depending on down payment) |
| VA Loans | No Limit. However, lenders favor a score of at least 620. |
| USDA Loans | No Limit. However, lenders favor a score of at least 640. |
- Conventional Loans: These loans are not backed by the government. Instead, private lenders such as banks and credit unions offer them.
- FHA Loans: The Federal Housing Administration backs FHA Loans. These loans have lower down payment requirements due to more flexible credit criteria. This government-backed loan especially benefits first-time home buyers.
- VA Loans: The Department of Veterans Affairs provides VA loans for eligible veterans, active-duty service members, and their spouses. These loans often have more lenient credit requirements and may not require a down payment.
- USDA Loans: The U.S. Department of Agriculture offers USDA loans to encourage homeownership in rural areas. These loans have flexible credit guidelines and may offer low or no down payment options.
Step 3: Get a Mortgage Pre Approval
A mortgage preapproval can tell you if you qualify for a loan. Additionally, you also get to know your mortgage interest rate and monthly payments. This way, you can manage your finances better.
Mortgage preapproval for a home loan shows sellers you are a serious buyer who won’t waste their time. Contact a lender to begin the process even if you are unsure about your loan eligibility.
Step 4: Track Your Expenses
A credit score is not the only criterion that a mortgage lender considers. Other factors, like income, savings, and previous loans, are also significant.
Create a budget to manage your finances. This helps you track your income, expenses, and savings goals. A well-managed budget can show lenders that you are responsible and capable of meeting mortgage obligations.
Step 5: Avoid Making Credit Mistakes
Before buying a property, you might not have enough time to improve your credit score. However, you can avoid these mistakes that could harm your chances of obtaining a mortgage.
- Missed Regular Payments: Late or missed payments negatively impact your credit score. Use reminders or automatic payments to stay on track.
- Don’t Open Multiple Accounts: When you open multiple accounts, the lender will carry out a hard credit check on all of them. Each hard inquiry temporarily lowers your credit score.
- Close Existing Accounts: Closing old credit accounts may reduce your available credit and shorten your credit history. This can negatively impact your credit score. Retain existing accounts to maintain a healthy credit profile.
- Using All Available Credit: Aim to keep credit card balances below 30% of the available limit. This helps maintain a healthy credit usage ratio and can boost your credit score.
- 🤔 What Is a Hard Credit Check? A hard credit check is a detailed review of your credit history. This is commonly done by lenders during loan or other credit applications and can impact your credit score.
How to Buy a House With Bad Credit Near Me
| Region | How to Buy a House Near Me |
|---|---|
| Northeast | Connecticut | Maine | Massachusetts | New Hampshire | New Jersey | New York | Pennsylvania | Rhode Island | Vermont |
| Midwest | Illinois | Indiana | Iowa | Kansas | Michigan | Minnesota | Missouri | Nebraska | North Dakota | Ohio | South Dakota | Wisconsin |
| South | Alabama | Arkansas | Delaware | Florida | Georgia | Kentucky | Louisiana | Maryland | Mississippi | North Carolina | Oklahoma | South Carolina | Tennessee | Texas | | West Virginia |
| West | Alaska| Arizona | California | Colorado| Hawaii | Idaho | Montana | Nevada | New Mexico | Oregon | Utah | Washington | Wyoming |
How to Get a Home Loan With Bad Credit?
Here are some ways you can get the best home loans for bad credit:
1. Build up Your Credit Score
Improve your credit score before applying for a mortgage. Pay your bills on time, minimize debt, and correct any errors on your credit record. Small improvements in your credit score can make a big difference on your mortgage.
Another strategy to improve your score is to keep your credit use low. Keep your credit card balances under 30% of your maximum credit limit.
» How to Fix My Credit to Buy a House: Here are the 8 proven strategies to quickly repair your credit score.
2. Save for a Larger Down Payment
Even with a poor credit score, you may be able to obtain a mortgage with a good down payment. Look for cheap houses for sale, as the down payment will likely be more affordable. A greater down payment lowers the loan-to-value ratio. Therefore, lenders may grant you a loan despite poor credit.
3. Find a Co-Signer
Request a trusted individual with a good credit score to co-sign the loan. Their creditworthiness can strengthen your application and increase your chances of approval. However, they also take responsibility for the co-signed mortgage.
4. Shop Around
Shopping around for a home loan is important if you have bad credit. It helps you check out different lenders to see who might be okay with your bad credit. You can find out about interest rates and fees and see which lender is the best fit for you.
Calculate Your Mortgage Affordability
| Region | State-Specific Mortgage Calculators |
|---|---|
| Northeast | Connecticut | Maine | Massachusetts | New Hampshire | New Jersey | New York | Pennsylvania | Rhode Island | Vermont |
| Midwest | Illinois | Indiana | Iowa | Kansas | Michigan | Minnesota | Missouri| Nebraska | North Dakota | Ohio | South Dakota | Wisconsin |
| South | Alabama | Arkansas | Delaware | Florida | Georgia | Kentucky | Louisiana | Maryland | Mississippi | North Carolina | Oklahoma | South Carolina | Tennessee | Texas | Virginia | District of Columbia | West Virginia |
| West | Alaska | Arizona | California | Colorado | Hawaii | Idaho | Montana | Nevada | New Mexico | Oregon | Utah | Washington State | Wyoming |
Are There Any Drawbacks to Buying a House With a Bad Credit?
Yes, buying a house with bad credit does come with certain disadvantages:
- Limited Loan Options: Many traditional lenders might not offer loans to individuals with low credit scores. You may need to look for loan programs developed only for bad credit holders.
- Higher Down Payment Requirements: A higher down payment reduces the risk the lender undertakes when issuing the loan. Saving for a larger down payment can be tough, especially with existing financial challenges.
- Higher Interest Rates: Lenders see individuals with bad credit as risky borrowers. Consequently, they might charge you a higher interest rate. This will raise the total borrowing cost and increase your monthly mortgage payments.
Bottom Line
While buying a house with bad credit is difficult, it’s not impossible. By carefully exploring loan options and lenders, you can find your path to homeownership.
To help offset the potentially high interest rates and down payments that come with bad credit, broaden your house hunt to include some of America’s most affordable locations. This way, you can find a home that fits comfortably within your budget.
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Frequently Asked Questions
Can I get an FHA loan with a 500 credit score?
No, it is unlikely to qualify for an FHA loan with a credit score of 500. The minimum credit score requirement for most FHA loans is 580.
What do mortgage lenders consider a poor credit score?
The required credit scores for mortgages differ based on the type of loan. Conventional loans demand a score of 620, while government-backed loans are more lenient. However, a score below 500 makes mortgage approval difficult.
How to buy a foreclosed house with bad credit?
Explore specialized lenders and consider FHA loans. Additionally, save for a larger down payment and work on improving your credit score for better terms.
Can I buy a house with bad credit?
Yes, government-backed loans like FHA or VA loans offer more lenient credit requirements. Consider a larger down payment or a co-signer to qualify for a mortgage with bad credit.
