How to Buy a Home with Bad Credit

 


Over 30% of Americans have credit scores below 670—and many believe homeownership is out of reach because of it.
But here’s the truth: you can buy a home with bad credit—if you take the right steps, choose the right loan, and work with the right team.

In this guide, we’ll show you exactly how to navigate the home-buying process, even with poor credit. From improving your score to choosing the best mortgage programs, this post covers it all.

What Is Considered Bad Credit?

Let’s start by understanding the numbers. Credit scores range from 300 to 850. Here’s how FICO typically categorizes them:

  • 800+: Exceptional

  • 740–799: Very Good

  • 670–739: Good

  • 580–669: Fair

  • Below 580: Poor

If your score is below 670, you're considered a subprime borrower, and lenders may view you as risky.

📉 Stat: The average FICO score in the U.S. is around 717 (as of 2024).

Can You Still Buy a Home with Bad Credit?

Yes! While a low credit score can limit your options, it doesn't mean you're out of luck.

There are several government-backed loan programs designed to help buyers with less-than-perfect credit.

💡 Pro Tip: Focus on getting pre-approved first to understand your realistic budget and loan options.

Step 1: Know Your Credit Score and Report

Before you start house hunting, get a free copy of your credit report from all three bureaus (Equifax, Experian, TransUnion) at AnnualCreditReport.com.

Check for:

  • Errors or inaccuracies

  • Accounts in collections

  • Missed payments

  • High balances

🧾 Highlight: Fixing just one error could raise your score by 20+ points instantly.

Step 2: Understand Your Mortgage Options

Here are the best home loan programs for buyers with bad credit:

FHA Loans

  • Minimum score: 500 (with 10% down) or 580 (with 3.5% down)

  • Backed by the Federal Housing Administration

  • Ideal for first-time buyers with low credit

VA Loans

  • For veterans and active-duty service members

  • No minimum credit score required by the VA (but lenders usually require 580–620)

  • No down payment and no private mortgage insurance (PMI)

USDA Loans

  • For rural and suburban buyers

  • Score of 640 usually needed, but exceptions made

  • No down payment required

Non-QM Loans (Subprime)

  • Offered by specialized lenders

  • More flexible credit rules

  • Higher interest rates and larger down payments

🏠 Pro Tip: Talk to a mortgage broker who can compare multiple lenders and loan types for you.

Step 3: Save for a Bigger Down Payment

A larger down payment can help you:

  • Offset lender risk

  • Qualify for better terms

  • Reduce or eliminate PMI

Aim for 10% to 20% down if possible, especially if your score is below 580.

💰 Highlight: Even 3.5% down on a $250,000 home equals $8,750, so start saving early.

Step 4: Reduce Your Debt-to-Income Ratio (DTI)

Lenders look at how much of your income goes toward debt each month.

To qualify, most lenders prefer:

  • DTI of 36% or less (some allow up to 50% for FHA)

Calculate yours:

matlab
(Monthly debt payments ÷ Gross monthly income) × 100 = DTI %

💳 Pro Tip: Pay down credit card balances to boost your score and lower your DTI.

Step 5: Get Pre-Approved for a Mortgage

Pre-approval shows:

  • What you can afford

  • That you’re serious

  • That you’ve already passed initial lender checks

Even with bad credit, many lenders offer pre-approval—just expect more questions and document requests.

📄 Highlight: Some online lenders specialize in low-credit borrowers—start there!

Step 6: Work with a Real Estate Agent Experienced in Low-Credit Deals

Not all agents are familiar with the challenges of buying with poor credit. Look for one who:

  • Knows local down payment assistance programs

  • Has lender connections

  • Can negotiate for you effectively

🤝 Pro Tip: Interview 2–3 agents before choosing. Ask about their experience with FHA, VA, or USDA buyers.

Step 7: Consider a Co-Borrower or Co-Signer

Adding a family member with good credit to your mortgage application can:

  • Boost your approval odds

  • Lower your interest rate

  • Help with income qualifications

Make sure both parties understand the legal and financial responsibilities.

👥 Highlight: Co-signers are responsible if you default. Use this option carefully.

Step 8: Use State or Local Assistance Programs

Many states offer:

  • Down payment assistance

  • Grants

  • Forgivable loans

  • Closing cost help

These programs often cater to first-time buyers and those with moderate to low income.

Check with your state’s housing finance agency or local nonprofit organizations.

🏛️ Stat: Some programs offer up to $15,000 toward your home purchase!

Step 9: Avoid New Debt During the Process

When buying a home, it’s crucial not to:

  • Open new credit cards

  • Buy a car

  • Finance furniture

These actions can change your credit score or DTI and cause your loan to fall through.

🚫 Pro Tip: Wait until after closing to take on any new credit.

Step 10: Don’t Give Up!

Improving your credit or working through loan obstacles takes time—but it’s worth it.

Even if you're not ready to buy now, start planning:

  • Monitor your credit monthly

  • Pay bills on time

  • Avoid large balances

  • Build savings consistently

🧠 Highlight: Many buyers go from bad credit to homeownership in 6–12 months with focused effort.

Summary: Yes, You Can Buy a Home with Bad Credit

Here’s a recap of the steps:

  1. Know your credit score and report

  2. Explore FHA, VA, and USDA loans

  3. Save more for your down payment

  4. Lower your DTI

  5. Get pre-approved

  6. Choose the right agent

  7. Consider a co-signer

  8. Use local programs

  9. Avoid new debt

  10. Keep improving your credit

Buying a home with bad credit is challenging—but absolutely possible. With a plan, the right loan, and a supportive team, you can make your dream of homeownership a reality.

Have You Bought a Home with Bad Credit?

What challenges did you face—and what helped the most? Share your story below to inspire other readers who may feel stuck!

Comments

Post a Comment