Buying a house is a major investment, but the wrong type of mortgage, unfavorable terms, and higher interest rates can easily turn it into a financial burden. If you’re wondering how to buy a house with bad credit without damaging your financial well-being, we’ll review several options in this guide.

Only 3.6% of all new mortgages in the first three quarters of 2023 were issued to borrowers with credit scores below 620. However, if you qualify for government-backed mortgages, you can still become a homeowner with a lower credit score. This is usually the only option if you can’t qualify for a conventional mortgage.

Can You Buy a House With Bad Credit?

The median credit score for new mortgage originations in Q1 2023 was 765. So, can you buy a house with bad credit? Yes, even if your credit score is less than 620, it’s possible to qualify for a mortgage.

Mortgage lenders usually use FICO scores (scores range from 300 to 850) to review your application. While you may find it difficult to qualify for conventional mortgages, it’s still possible to qualify for other mortgage types, such as FHA loans, if you have bad credit.

What Do Mortgage Lenders Consider a Bad Credit Score?

Most mortgage lenders consider a credit score of under 620 to be a “bad credit score.” For example, if you’re applying for a conventional mortgage, you’ll need a credit score higher than 620 to qualify.

If you’re applying for a government-backed loan, such as an FHA loan, you’ll need a credit score of at least 500 to qualify. If you have a credit score below 500, it may be best to first focus on credit score repair before you apply for a mortgage. 

Loan Options Available To Buy a Home When You Have Bad Credit 

Loan options from conventional lenders can vary depending on your financial history. The minimum credit score needed for a conventional loan is 620. However, you may find lenders willing to work with you if you show good money management in other areas.

Debt expert and founder of Greenbacks Consulting Teresa Dodson encourages consumers with the following advice: "Debt-to-income ratio is a big part of getting a home loan. If you can show a good, steady income and no debt, this helps your chances even with a low credit score.”

If you’re wondering how to buy a house with no money down and bad credit, you may want to consider other options, which we’ve listed below, along with the credit score requirement for each option.

FHA Loans

FHA loans are mortgages backed by the Federal Housing Administration (FHA). The minimum credit score required for FHA loans is 580 if you have a 3.5% down payment and 500 if you’re putting down 10%.

FHA loans are a great option for those with a lower credit score because you’ll still be able to get interest rates comparable to conventional loans. However, you’ll need to pay mortgage insurance.

USDA Loans

USDA loans are mortgages guaranteed by the U.S. Department of Agriculture’s Rural Development Guaranteed Housing Loan Program. These are zero down payment mortgages specifically designed for home buyers in eligible rural areas and towns.

This type of loan is a great option because it offers lower rates compared to conventional mortgages and has no down payment requirements. For example, in January 2024, the interest rates for USDA loans were 5.125%, while the interest rate for a conventional 30-year mortgage was 6.3%.

While this is a viable option to consider, you’ll need a credit score of at least 640 to qualify. If you have no credit history, lenders may evaluate using alternative criteria.

VA Loans

VA loans are backed by the U.S. Department of Veterans Affairs and are available to veterans, military service members, or their spouses. VA loans don’t require a down payment, and there are no set minimum credit score requirements.

However, most lenders will require a credit score of at least 500 to qualify for a VA loan. One of the key benefits of VA loans is that the interest rates may be lower than conventional mortgages. 

However, you’ll have to pay a funding fee in addition to the closing costs. Funding fees vary based on whether you’re a first-time homebuyer if the loan is for subsequent use, and if it’s a refinance loan.

5 Tips for How To Buy a House with Bad Credit

If you have a poor credit score, you may be wondering, “How can I buy a house with bad credit?” There are lenders and mortgage options available, but it’s important to do your homework and take steps to improve your chances of approval. We’ve outlined a few tips below to help you get started.

1. Check Your Credit Report

Start by getting a free credit report from all three credit bureaus (Experian, Equifax, and TransUnion) to review the information on file. It’s important to verify that all the information is correct.

If you spot any errors like late payments or collections that aren’t accurate, you can dispute these items to have them removed, which may increase your credit score. Knowing your credit score will help you better understand your options.  

2. Improve Your Credit Score

While there are lenders that offer bad credit loans and mortgages, having a good credit score is a great way to get better loan terms and mortgage rates. Improving your credit score before you start the home-buying process is ideal.

Once you’ve checked your credit report for errors, you can work on improving your score by paying down debt to reduce your credit utilization ratio, not taking out new loans and credit cards, and making on-time payments on all your bills to improve your payment history.

3. Establish a Budget and Stick To It

Your credit score is not the only thing a mortgage lender will consider. They’ll also look at other eligibility factors like previous loans, income, and savings. If you’re considering applying for a mortgage in the future, it’s important to start managing your finances effectively today.

Create a monthly budget, track your expenses, and create a savings goal so you can save a larger down payment. This will also allow you to make changes and reduce expenses where necessary so you can pay down debts.  

4. Pay off Outstanding Debts

If you’re not sure how to buy a house with bad credit, one of the best places to start is reducing your debt. Mortgage lenders will look at your debt-to-income ratio, which measures your monthly income against your monthly debt payments.

If you have maxed out your credit limit or have many loans, use repayment strategies like debt snowball or avalanche. Avoid taking on any new credit to reduce your DTI ratio and improve your credit score.

5. Save for a Larger Down Payment

Even with bad credit, you may be able to get a home loan with a larger down payment. While you can get a mortgage with just 3% down, putting down a larger amount will boost your application.

A larger down payment will also have you more equity from the start, which is viewed favorably by lenders. However, you’ll want to make sure that you don’t use up all your savings to purchase a home. You should still have enough savings to cover unexpected expenses. We recommend saving at least six months of mortgage payments.

Buying a House With Bad Credit Is Possible

Having a low credit score doesn’t automatically disqualify you from getting a mortgage. The tips we’ve discussed in this guide on how to buy a house with bad credit are a good starting point. If you’re not considering homeownership soon, consider working on improving your credit score.

Government-backed loans are also a good option if you want to purchase a house now. We recommend taking a good look at your finances and getting a mortgage preapproval to check the loan amount and the rates you qualify for to find the best mortgage and to ensure you’ll be able to afford the monthly payments.