If your credit isn’t the best, you could be forgiven for assuming that a home loan is just out of your reach. Most people who get conventional loans have a score of at least 700, so if your score is in the 600s or below, a conventional loan may not be for you.
However, nearly seven percent of conventional loan borrowers have a credit score between 650 and 699, while a little more than one percent have scored even lower than that. So, while it’s unlikely that you’ll get a conventional loan with a low credit score, it’s not impossible.
Of course, you can also apply for non-conventional loans, like those offered by the Federal Housing Administration (FHA), the Veterans Administration (VA), or the U.S. Department of Agriculture (USDA). You can get an FHA loan with a credit score of 500 and 10 percent down, while VA loans and USDA loans have no lower credit limit. Here’s how to finance your home purchase when you have a lower credit score.
Know the Cost of Buying a Home with Bad Credit
The main reason why people say you should have great credit before you try to buy a home is that your credit score determines the interest rate you’ll receive on your loan. The better your credit score, the lower your interest rate, and the lower your interest rate, the less you’ll pay for the loan.
If you have lower credit, you’ll have to pay a higher interest rate on your loan. For example, someone with an excellent credit score of 760 to 850 might get an interest rate as low as 2.805 percent, which means they’ll pay $135,525 in interest over the life of a 30-year fixed loan of $282,240 (which is about what you’d pay for the average home in the U.S., after making a 20 percent down payment). Someone taking out that same loan with a credit score in the low 600s will pay $226,205 in interest over the life of the loan.
That’s a lot more money – so much more that you might be tempted to hold off on buying a home until you can get your credit score up. But home prices are going up steadily around the country right now, and interest rates could go up too. You can’t look into the future and see how much it will cost you to get a mortgage six months or one year into the future. But if you’re looking to get a mortgage in a hot market like Charlottesville, VA, it’s probably best not to wait if you can help it. You can always save money on interest by paying extra towards your principal in the early years of the loan.
Look for Bad Credit Home Loan Options
Bad credit home loans are available from the USDA and the VA with no minimum credit score requirement. If you’re a first-time homebuyer, many states offer loan programs with low-interest mortgage options and even down payment grants to help buyers get into their first homes. The HomeReady loan from Fannie Mae and the Home Possible loan from Freddie Mac also offer avenues to homeownership for low-credit borrowers.
Don’t Make Any Big Purchases Until After You Close
Once you’ve decided to start applying for mortgages, you should avoid making any large purchases on credit, getting any loans, opening any credit cards, or basically making any financial changes at all until after you’ve closed on your new home. Charging large purchases or taking out new loans affects your debt-to-income ratio, which needs to stay stable throughout the underwriting process – and if you buy too much on credit while you’re in underwriting for a home loan, you could torpedo the loan. Opening new credit cards could lower your credit score, which you want to avoid during underwriting.
The only financial changes you should be making while you’re in the process of shopping for and securing a mortgage are those changes that could improve your credit score, like paying off outstanding debts or disputing inaccurate data on your credit report. These kinds of changes might not appear on your credit report for up to a month after they occur, but if you’ve done a lot of work on improving your credit score in the last weeks before you apply for a mortgage, ask your lender to do a rapid rescore. A rapid rescore will expedite the appearance of positive changes on your credit score, but it will also expedite negative changes, so use it wisely.
Getting a mortgage with bad credit isn’t as impossible as you might think. There are actually a lot of different mortgage options for bad credit borrowers, so if your credit isn’t great, don’t despair – home ownership is not out of reach for you.
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FAQs
Generally, you need a score of at least 620 to qualify for a conventional home loan. But if you have a lower score — or no score at all — you may still be able to buy a house with certain loan programs or by applying for a loan with a cosigner. FHA, VA and USDA loans have lower or no credit score requirements.
Can I get a mortgage if my credit score is very poor? ›
Even if you have bad credit, lenders may look beyond just your credit score to assess your situation. Having a few small issues in your past, such as the odd late payment on your phone contract, should not stop you from getting a mortgage.
Can you buy a house with a 500 credit score? ›
The lowest credit score typically required to buy a house is 500 with an FHA loan, which requires the borrower to make a 10% down payment. For credit scores of 580 or higher, a 3.5% down payment is sufficient. Conventional loans typically require a minimum credit score of around 620.
Can you get a mortgage without a good credit score? ›
While getting a mortgage without a credit score requires more paperwork, it's not impossible. You just need to find a “no credit mortgage lender” who is willing to do something called manual underwriting—like our friends at Churchill Mortgage.
Which mortgage lender is the easiest? ›
Easiest mortgages to qualify for
- Best overall: Rocket Mortgage.
- Best for lender programs and discounts: CitiMortgage®
- Best for low credit scores: Cardinal Financial.
- Best for VA loans: Navy Federal Credit Union.
For a conventional mortgage in California, you typically need a minimum score of at least 600. If you qualify for certain government-backed loans, however, you may be able to buy a home with a score as low as 500.
What credit score is needed for a 300K house? ›
The required credit score to buy a $300K house typically ranges from 580 to 720 or higher, depending on the type of loan. For an FHA loan, the minimum credit score is usually around 580.
What is the FHA minimum credit score? ›
Credit score: While the FHA has set the minimum credit score at 500, many FHA-approved lenders require higher minimum FICO scores of at least 620. Down payment: While obtaining an FHA loan requires you to make a down payment, that payment doesn't necessarily have to come from your savings account.
What is minimum credit limit to buy a house? ›
The minimum credit score needed for most mortgages is typically around 620. However, government-backed mortgages like Federal Housing Administration (FHA) loans typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs).
What credit score is needed to buy a $400,000 house? ›
Most mortgages, including conventional loans, require a credit score of 620 or higher. It's possible to get an FHA loan with a credit score as low as 500, but many lenders require higher scores.
The minimum FICO® Score for a conventional mortgage
The minimum FICO® Score required for a conventional mortgage is 620. And it's worth noting that the 620 score is the minimum threshold set by Fannie and Freddie -- individual lenders might have their own stricter requirements.
What is the best home loan for bad credit? ›
FHA loans. The Federal Housing Administration (FHA) insures FHA loans, which allows mortgage lenders to accept a credit score as low as 580 with a 3.5 percent down payment, or 500 with a 10 percent down payment.
Can I buy a house if my credit is not good? ›
Buying a house with bad credit may not be easy, but it's possible. If your credit score isn't great, you can apply for certain home loans that have more accessible eligibility requirements (including for low or no down payments). Just know that with bad credit, you're unlikely to qualify for the best mortgage rates.
Can you buy a house with no credit and a co-signer? ›
Using a co-signer can be helpful for buyers with no credit, but co-signing a mortgage is a huge responsibility. For someone to qualify as a mortgage co-signer, they need good credit and a positive credit history.
How many years of credit history to buy a house? ›
How Many Years Does It Take to Establish a Good Credit History? If you're just starting out, you can establish a credit history good enough to qualify for a mortgage within two years. This requires that you have a mix of different account types and make all of your payments on time, in addition to a few other things.
What credit score is considered very poor? ›
A poor credit score falls between 500 and 600, while a very poor score falls between 300 and 499. “In general, people with higher scores can get more credit at better rates,” VantageScore says. So you could have trouble getting approved for higher-limit, low-interest cards with a credit score of 600 or below.
Can you borrow money against your house if you have bad credit? ›
Quick answer: You can get a home equity loan with bad credit, but you will most likely need more equity and less debt than someone with good credit. You will also pay a higher interest rate. Your best chance of approval might be going with your current mortgage lender.
Can I buy a house with a bad credit score? ›
Generally, you need a score of at least 620 to qualify for a conventional home loan. But if you have a lower score — or no score at all — you may still be able to buy a house with certain loan programs or by applying for a loan with a cosigner. FHA, VA and USDA loans have lower or no credit score requirements.
How far back do mortgage lenders look at credit history? ›
There are many factors that lenders consider when looking at your credit history, and each one is different. The typical timeframe is the last six years.
