How to Buy a House With Bad Credit

House Credit

The downsides of renting a home or apartment can make the goal of buying a house feel urgent, but if your credit isn’t where it needs to be, you may want to slow down and think it through. 

The good news is that you might be able to buy a house with bad credit. (Depending on just how bad it is.)

The bad news is that it will cost you!

Buying a house with bad credit means you’ll have to have a larger down payment, such as 10-20% instead of 5%, and pay a much higher interest rate

VA, FHA, or USDA loans might approve you with a lower credit score than what’s conventionally accepted, but you may have to make some compromises to make up for your bad credit score. 

What is Considered a Bad Credit Score?

A bad credit score is more than just a number. 

Mortgage lenders consider your entire credit and financial profile when reviewing your loan application. 

Even if you’ve brought your score up to a decent range, you could still get held up by your debt to income (DTI) ratio or your Loan to Value (LTV) percentage. Those two are a little more complex, so we’ll revisit them later.

Let’s talk about what makes a credit score bad. 

If you’ve done the work of pulling your credit report, your score will fall under one of the ranges below with a rating from Poor to Exceptional. A bad score would be in the Poor to the low Fair range.

  • Under 580: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very Good
  • 800+: Exceptional

Bad credit scores tell lenders that your history of repaying your debts and maintaining your accounts isn’t favorable. They see it as potentially putting them at risk of losing money if they approve your loan. 

This can look like too many late payments, accounts in collections, high revolving debt balances, and bankruptcies.

To balance the risk of taking on a loan with a bad score, your mortgage lender could include requirements for your home loan that borrowers with good scores wouldn’t have to meet. 

These extra requirements can take away some of the cost-saving benefits of homeownership. 

So before you apply for a mortgage with bad credit, it’s best to determine what your goals are for becoming a homeowner. Then decide whether the compromises are worth it.

Can You Buy a House if You Have Bad Credit?

Short answer—Yes. 

But it was much more expensive. 

In many cases, even when your lender can qualify you with a low credit score, they’ll likely need a large down payment of anywhere from 10%-20% depending on the type of loan. 

They could also apply a higher interest rate which means tens of thousands of dollars more in interest over the life of your loan. 

A better option is to work on raising your score first and then apply. It’s a long-term strategy, but you can learn how to raise your score 200 points and gain the benefits that come with it: 

  • You may get to choose the loan option you want, not just the one you qualify for
  • Save thousands of dollars in interest
  • Lower monthly payment
  • Lower down payment
  • The loan approval process can sometimes be easier and faster. 

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