Can I buy a house with bad credit? Maybe - but it won't be easy

According to Experian, about a third of Americans have bad credit (defined as a credit score lower than 601). And some people have no credit history at all, which can similarly disadvantage them when it comes to making major life purchases, such as a home. Not surprisingly, thousands of potential homeowners are wondering whether home ownership is attainable with their credit scores.

How can you buy a house with bad credit? Here’s what you need to know. 

Not all bad credit is alike

FICO credit scores range from 300 (poor) to 850 (excellent). You'll need to have a score of at least 620 to be eligible for the majority of conventional loan options. However, it is still possible to get a home loan with a credit score of less than 620. Here's how.

• 580 and up: A score of 580 is the usual minimum required for a USDA loan - and you can have a down payment as low as 3.5%. If you're a veteran, you may also qualify for a VA loan - lenders typically set the minimum score for this at 580 or higher.
• 500 and up: with this score you can qualify for a loan backed by the Federal Housing Administration (FHA)if you put 10% down. The lender will want you to pay off any outstanding debts first.
• What if my score is under 500? Lenders aren’t going to issue a home loan to someone whose credit score is under 500. While this might feel disappointing, the good news is that it’s possible to improve your credit and get to a point where you can qualify for a home loan. 

"580 is the minimum to get a home loan because the majority of mortgages are backed by investors [including pension & retirement funds], or the US Government," notes Houwzer mortgage advisor Andrew Leonardis. "That means defaults hurt us all! FICO scores have shown to be fairly accurate at predicting how frequently a loan could default, so it is just one of the measurements used to help contain risk."

I make $X per year - can I buy a home?

Plenty of people are wondering how to buy a house with bad credit but good income. The reality is that income is only one part of determining your credit score (visit our mortgage guide for more info). Lenders don't want to just know that you have money - they want to make sure you can manage it. Your credit history helps determine how much a lender is willing to loan.

It will help you build good credit if you can use your income to pay off old bills - and it will be easier to get a loan if you can put down a large down payment. 

Improve your credit

You can see month-to-month changes in your credit score if you pay your bills on time and improve your credit utilization ratio (this is how much debt you have versus how much credit you qualify for - most experts believe that you should stay between 10% and 30% of your total potential credit). 

• You can improve your credit score by:
• Automating your bills so that you never get behind a payment.
• "Try to set your autopay for more than the minimum payment; even if only by $1," recommends Leonardis.  "This reports as 'Above minimum payment' for the credit algorithms, which will help if you consistently do that."
• Keeping unused cards open - they can help boost your credit utilization ratio.
• Adding your cell phone bill. If your cell phone bill isn’t a part of your credit report - and you pay on time - add it via Experian Boost.
• Taking a look at your credit report and checking for inaccuracies. You can dispute errors.
• A service called Self allows people interested in building their credit score to essentially pay off their own loan. They pay Self every month in amounts as low as $25, and their payments are held in a certificate of deposit. Once they pay off the loan, they receive the money back.

While improving your credit may feel like a slog, it will help you establish good payment practices that will be useful to have once you own a home.

Alternatively:

• Cash: If you have bad credit but a lot of money saved, you can pay for your home in cash - and you won’t need to worry about credit scores. According to USA Today, about 16% of homeowners pay for their homes with cash.
• Some landlords will do a rent-to-own arrangement in which the renter gradually pays off the home until they own it outright, and landlords can accept any credit score - and often will consider doing so if you can pay first, last, and security upfront. However, proceed with caution in these arrangement, since the majority of the risk is typically on the side of the renter.
• Come up with a larger down payment: the more money you can put down in the beginning, the less risky you look to lenders - and they may be willing to overlook a less-than-ideal credit score. You will still need a score over 500, though, and ideally your contribution will be at least 20% down.
• Find a co-signer. If you can find someone willing to sign onto the mortgage with you - such as a partner or parent - you may be able to significantly increase your chances of receiving a loan. However, this does come with risk for the co-signer (and for you). Once they sign, they will be responsible for the debt if you default; they will also, legally, own part of your home.

Be prepared to shop around

If your credit is low, but still high enough to warrant a loan, one thing you’ll want to do is shop around to various mortgage lenders to get different offers. Don’t just walk into your bank and assume that your first offer is the best offer: instead, do your research. 

"When shopping around, present yourself with options, but don't overdo it and cause paralysis by analysis," advises Leonardis. "Talk to a number of lenders and develop a rapport with them, then when the time comes, pick your top three to move forward with. Try to vary the types of mortgage originator you are speaking with; talk to a broker, lender and a bank if possible."

If that sounds like a lot of work, consider working with Houwzer: Houwzer’s mortgage team shops around to various lenders on behalf of homebuyers so that they get the best rates possible for their unique situation. 

Save money for the additional fees

Unfortunately, having bad credit can be more expensive than having good credit. When you have a lower credit score, you’ll receive higher mortgage rates - meaning you’ll pay a little more every month in interest on your mortgage payments. 

If you only qualify for an FHA loan and can’t put 20% down, you’ll need to set aside money for FHA’s mortgage insurance premium, which is an additional monthly fee you pay that protects the lender against you defaulting - and it stays in place for the lifetime of the loan.

Can you buy a home after declaring bankruptcy?

What if your credit is bad specifically because you’ve gone through bankruptcy? 

• For a chapter 7 bankruptcy (when your debts are entirely wiped), the soonest you could obtain a home loan is two years after your bankruptcy is discharged - at that point, you may be able to qualify for a VA or FHA loan. If you can show that the factors leading to your bankruptcy were out of your control (like medical expenses), this waiting period can drop to 12 months. For a conventional home loan, expect to wait a minimum of two years if the circumstances were extenuating, and four years if they weren’t. 
• For a chapter 13 bankruptcy (restructuring of debt), the soonest you could obtain a home loan is one year for a government-backed loan, and four years for a conventional loan. 

Keep in mind that these are only minimums: you will need to show lenders that you have been making on-time payments since your bankruptcy and working to build good credit.

So: is purchasing a house with bad credit possible?

It may take some time, but with patience and sound financial planning, you should be able to get there! 

Further Reading:

• Do Student Loans Affect Buying a House? What Millennials Should Know
• Can I Buy a House with My Friend? How Mortgages Work Without a Spouse
• Private Mortgage Insurance: Why Do I Need It, and How Can I Get Rid of PMI?