How to Buy a House with Bad Credit

Posted on by David Lukic in Credit August 05, 2020

how to buy a house with bad credit

Buying your own home is the American Dream, but it might seem out of reach to those with bad credit. However, the good news is, if your credit is less than perfect, you do still have options and in most cases, can still buy a home. You might have to put down more money or accept a higher interest rate, but there may be a solution.

What Do Mortgage Lenders Consider a Bad Credit Score?

According to the Fico® Score, a score of bad credit is considered less than 650. Any score below 650 is going to make it more difficult for you to get a mortgage. Most lenders like to see a score of 680 or higher. 

Your credit report is a compilation of the last seven years of your financial history. It will include loans, mortgages, foreclosures, and bankruptcies. The credit report will also detail each account (including credit cards, student loans, and other debts) and how well you paid them or if you defaulted. 

There are three big credit reporting agencies (Equifax, TransUnion, and Experian) who collect and collate all this information, and they provide it to lenders to help them decide your creditworthiness. All the information contained in your credit report is used to calculate a credit score. The FICO score is used by mortgage lenders to determine your risk factor. Below is the gauge they use:

Exceptional Credit


Very Good Credit 


Good Credit


Fair Credit


Poor Credit


Tip 1: Get a Copy of Your Credit Report

The first step in buying a house with bad credit is to get a copy of your credit report to see where you stand and where the issues lie. You might have errors on your report or find there are things you can fix. You are entitled to an annual free copy of your credit report from each of the credit bureaus. You can contact them below:

 Equifax : 866-349-5191

 TransUnion : 800-916-8800

 Experian : 888-397-3742

Once you have a copy of your credit report, read it over carefully. Look for errors or accounts you don’t recognize. You may find you have been a victim of identity theft or fraud due to one of the many data breaches. If there are errors, contact the credit bureau immediately to get them resolved. On any account that was paid off and shows as default or unpaid, the credit reporting agency must open an investigation to prove it. Be sure to have your canceled checks handy so you can show it was paid off. 

If everything looks accurate, but you have some late payments or too much debt, you can work with that.

Tip 2: Find a Flexible Lender Who Handles FHA Mortgage Loans

FHA (Federal Housing Administration) loans have no minimum credit score; therefore, the lender can decide how low they want to go. Some lenders will allow you to buy a home with an FHA loan with a score of 500 or less, and you can put down as little as 3.5%. However, FHA loans do come with a downside. You will have to fill out a lot more paperwork, and you can never get rid of PMI regardless of how much of the loan you pay off.

Tip 3: Bring a Larger Down Payment to the Table

If your credit score is too low to qualify for traditional financing, your lender may require you to put down more money. In some cases, they will want to see 20% of the loan as a down payment. This penalty may seem like a lot, but it shows the lender you are willing to take more of a risk, and it alleviates their fear of you walking away from a mortgage and them not getting paid. If you plan on buying a house down the road, start saving now, so you have the cash ready when you need it.

Tip 4: Rebuild Your Credit

If you are denied a mortgage completely or find the terms to be unacceptable, the next best option is to rebuild your credit and improve things before trying again.

  • Once you have a copy of your credit report, you will see where the problems lie. If you have too much debt, make it a priority to pay it all off.
  • If you have a lot of late payments, pay your bills on time, every month.
  • Credit card debt is a killer with high-interest rates. Pay those off before you apply for a mortgage loan.

Rebuilding your credit won’t happen overnight, but you will see improvements quickly if you keep at it diligently. 

Another good suggestion is to sign up for credit monitoring with a company like to monitor where you are and how your score changes over time. They can also show you some red flags to help fix problems with your credit.

The dream of owning your own home does not need to be out of reach. It might just take a little more time and effort, but you can get there!

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