You might think having a credit score in the 500s would keep you from buying a home. But that isn't always the case.
Depending on your circumstances, you may have lending options that make it possible to overcome that lousy credit barrier when buying a home. This guide will teach you how to buy a house with bad credit and where to go to find financing that will work for you.
What Is the Credit Score Needed To Buy a Home?
The minimum credit score you need to buy a home will vary based on a few factors:
- The type of mortgage you want
- The lender you're asking
- Who you are
Minimum Credit Score Needed for Different Mortgages
Certain home loans allow you to qualify with a lower credit score, while others require a higher score.
- Traditional fixed-rate loans typically require a minimum score of 620 to qualify.
- Adjustable-rate mortgages (ARMs) require a minimum score of 600
- FHA loans backed by the U.S. Federal Housing Administration require a minimum score of 580 if you make a down payment of 3.5%
- FHA loans with a 10% down payment only have a minimum requirement of 500
So, if you have the capital to make a 10% down payment on the house you want, you may be able to buy a home even with a 500 credit score. You need to find the right lender, which leads us to the next factor…
Lender Credit Score Requirements
Every lender has a minimum credit score required to approve homebuyers for a mortgage. Some lenders will accept lower credit scores, while others have stricter requirements.
For example, a prominent national lender may approve a homebuyer with a 620 FICO for a fixed-rate mortgage. However, a smaller local bank might require a minimum score of 700 to qualify for a mortgage with them.
As a homebuyer with bad credit, be prepared to shop around. This means you must look for the right lender with a lower credit score. Online lenders, big national banks, or credit unions may all offer more flexible score requirements.
Also, lenders may change their requirements depending on the economy. Sometimes, lenders may be more flexible about approving a loan for a homebuyer with bad credit. During economic slowdowns, lenders may tighten their credit score requirements, making it more difficult to qualify. During a strong, stable economy, they'll relax those requirements.
VA Loans' Credit Score Requirements
Your situation regarding getting a mortgage with bad credit may also come into play. The best example is VA loans, which the U.S. Department of Veterans Affairs backs. VA loans have no minimum credit score requirement.
They also have no down payment requirement. As a Veteran or Military Service Member, you can buy a house with bad credit with no money down, assuming you can find the right lender.
While the VA has no minimum score or down payment requirements, lenders that provide VA loans may still have those requirements. However, the minimum credit score requirement for any VA loan will typically be much lower than the requirement for any other loan from the same lender.
First-time homebuyers can also generally find more flexible credit score requirements through specific programs, like the HomePath Ready Buyer through Fannie Mae and HomeOne lending program through Freddie Mac. It's important to note that both programs can also work for homebuyers that have owned previously, as long as you haven't owned a home in three years or more.
Another example of how your circumstances can make it easier to buy a home with bad credit is if you are a member of a credit union. Credit unions often have lower credit score requirements, but they may have even more flexibility for actual members.
So, What's the Secret To Buying a House With Bad Credit?
No matter your circumstances, there is one surefire way to find all the opportunities available to you to buy a house with bad credit. All it takes is one free phone call and a quick consultation with a HUD-certified housing counselor.
Housing counselors are a little-known resource that anyone can take advantage of anywhere in the U.S. They provide free information and one-on-one confidential counseling to homebuyers, and they know all the local programs, lenders, and services available in your area.
Why You Need a Housing Counselor
The U.S. Department of Housing and Urban Development (HUD) approves nonprofit financial counseling organizations to provide housing counseling. Counselors undergo extensive training, learning about federal, state, and local programs that help homebuyers achieve the dream of homeownership.
Housing counseling agencies are local and are approved to provide counseling in a specific state and region. That hyper-local focus means they know every avenue available to help homebuyers out. Thus, in one consultation with a housing counselor, you can learn about any option in your area that helps bad credit homebuyers get approved.
So, if you want to buy a home with bad credit, the first step is to call a HUD-certified housing counselor in your area. Depending on your situation, there may be a few extra steps. We'll describe each one in more detail now.
Several federal programs help first-time homebuyers that have bad credit. Some banks also offer first-time homebuyer programs. And remember that you don't need to be a first-time buyer to use these programs. Many first-time homebuyer programs apply to anyone that has not owned a home in at least three years.
So, whether it's your first time buying or just your first time in a long time, here are the steps you take to buy a home with bad credit:
- Find a housing counselor in your local area. The Consumer Financial Protection Bureau (CFPB) offers a helpful tool that lets you search for housing counseling agencies by zip code.
- Call for a home buyer consultation. Let the counselor know you are a first-time homebuyer that has bad credit. They'll review your finances with you and may ask you to check your credit. Don't worry; this is a soft credit pull, so that it won't affect your score.
- Learn about the options available to you. The counselor will explain programs that you can qualify for where you want to buy. These programs will have low minimum credit score requirements. They may also offer down or no down payment amounts. There may also be programs to provide down payment and closing cost assistance.
- Take a first-time homebuyer course. Many first-time homebuyer programs require you to provide a certificate of completion for a HUD-approved first-time homebuyer course. You take the 8-hour course, whether in person or online and receive a certificate of completion. This certificate is good for up to one year.
- Create an action plan with your counselor. Your housing counselor will help you create an action plan to get ready to buy a home. Together, you'll set a budget and map out the steps you need to take to become mortgage-ready.
If you're a military Veteran, Service Member, or surviving military spouse, then you have an advantage as a homebuyer with VA home loans. The VA does not place any lending requirements on their insurance loans. There is no minimum credit score requirement and no down payment requirement.
That means you can buy a house with no money down and bad credit in the right circumstances and with the right lender.
Step 1: Contact the Right People To Find the Right VA Loan
In this case, there are several organizations you can reach out to that will help you find the loan you need:
- Contact your local Department of Veterans Affairs or a Veteran service office in your area.
- Find help through the United Way's local Mission United if you have one in your area.
- Find a local housing counselor.
Any of these organizations will be able to put you in touch with the right people and programs to get a loan, despite any bad credit and down payment challenges you may be facing.
Unlike first-time homebuyer programs, there are typically no extra hoops you need to jump through to qualify for a no-money-down bad credit VA loan. You need to know lenders in the area with the best terms. All the organizations listed above should be able to help you find those.
Step 2: Get Your Coe
Qualifying for a VA loan requires a Certificate of Eligibility (COE), which you can apply online. You will need specific documentation to prove your eligibility. If you are a National Guard or Reserve member, you will need thorough documentation, depending on whether you are active or discharged and have been activated. This differs for Veterans, Service Members, and surviving spouses.
Step 3: Contact the Lender or Mortgage Broker
Once you have your COE, you can contact lenders that provide VA loans in your area and start shopping for the right loan.
Lenders should be able to share if they have any upfront credit score or down payment requirements on VA loans. You shouldn't need to apply to determine if you can qualify with a particular lender. It may be a good idea to talk to each lender before using it to see if they'd be willing to work with you.
Credit bureaus will treat mortgage applications made within two weeks as just one inquiry. This allows you to shop and find a lender with the best rate without driving down your credit score. That's important because while you can get approved for a mortgage with bad credit, the interest rate will be much higher. That brings us to our next point…
Should You Buy a House With Bad Credit?
Now that we've gone over all the options that may help you buy a house with bad credit let's focus on whether you should take these options and run with them.
While plenty of lending products offer mortgages to people with bad credit, they all have one thing typical—higher costs. The interest rate on a mortgage for someone with bad credit will be much higher than that for someone with good credit. The monthly payments will be higher, and so will the total cost of financing your home.
So, for example, a Veteran with bad credit can qualify for a VA loan because there's no credit score requirement. But their costs to buy a home and their monthly mortgage payments will be higher than the same VA loan for a Veteran with good credit.
This makes it crucial to consider your situation carefully and decide if it's worth waiting to improve your credit before you buy. If you can take six months to build your credit while building up savings for a larger down payment and building a budget to support you as a homeowner, you'll be in a much better position.
You should discuss this with your HUD-certified housing counselor in your free homebuyer evaluation. They can help you review your credit and create steps to improve it as part of your home buying action plan.
Then, once you complete that action plan, your credit and finances will be in a much better state to apply for mortgages. You can take two weeks to shop around without hurting your credit, find the best loan, and get pre-approved by the mortgage lender. These are all steps you want to take regardless of your credit score, but they're even more critical when your score is low. So, as a final note, let's look at the fundamental steps any home buyer should take when buying a home.
Essential Steps To Take
The steps you take to buy a home with bad credit are the exact steps anyone should take when purchasing a home. These steps increase your chances of getting approved for a mortgage and having your offer accepted. That's more important than ever, given how competitive the homebuying market is nowadays. You have to compete against cash buyers, investors, and people like you who are just looking for a good home. The more you prepare, the more likely you are to succeed.
With that in mind, in order these are the steps you should take to buy a home:
- Find a HUD-certified housing counselor in the area where you want to buy your home.
- Get a free financial evaluation to learn about your lending options and mortgage assistance programs.
- Create an action plan so you can become mortgage-ready.
- Once you follow those steps, start shopping for a mortgage. Take two weeks to apply and compare rates from lenders.
- When you find the best mortgage for your needs with the lowest interest rate, ask the lender to provide a mortgage pre-approval letter. You will want this letter when you start shopping for a home.
- Also, work with the lender to set up an escrow account. Put some down payment savings into the account immediately to set up earnest money. This is 1-2% of the home's purchase price you will want to save in escrow. Having earnest money shows sellers you are a severe homebuyer.
A mortgage pre-approval letter and the earnest money will give you the best chances of accepting an offer when you buy a home. Sellers and their agents will understand that you're a serious buyer that can make a serious offer on a home.
Your pre-approval letter will also help you narrow down your home search. That's why it's good to shop for your mortgage first, then start shopping for a home. You'll know exactly how much home you can afford to buy.
Be Smart About Shopping for a Home
Once you have all these ducks in a row, you're ready to start the actual homebuying process. You can start looking for your dream home. If this is your first time buying, getting a Realtor® or a real estate agent can be immensely helpful.
A good agent can help you:
- find homes that fit your needs
- make offers
- negotiate the best price and terms with the seller
You can do all that on your own, but it cannot be easy if you've never gone through the process. Even if you have gone through the process, having an agent can make the home buying process smoother and less stress-inducing.
Once you reach an agreement with you're the seller on the price, you'll contact the mortgage lender. They will start finalizing your mortgage agreement, and you'll be on your way to closing!
Prepare for the Costs of Homeownership
One final tip is that during the home buying process and up to closing, you want to ensure you're prepared for the costs of being a homeowner.
This is something most people underestimate. You're used to having a landlord or property manager that fixes things when they break. That's all on you as a homeowner. You'll have to find repair techs you can trust and ensure things get resolved to your satisfaction.
Homeowners also want a more robust emergency savings fund because home repairs can get expensive. Significant maintenance, such as replacing your water heater or major appliances or fixing your heating or air conditioning unit, can run a few thousand dollars a pop. And it's a homeowner's luck that most things usually break simultaneously.
So, make sure you set a budget to be a good homeowner before closing day. Put added savings in at the beginning to build your emergency fund and give you a little extra something for decorating after you first move in. This will help ensure you have the best possible experience once you become a homeowner.
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This article was produced and syndicated by Wealth of Geeks.
Featured Image Credit: Pixabay.
Meghan Alard is a guest contributor for Debt.com. She’s been a staff writer for ten years at one of the nation’s largest and oldest nonprofit credit counseling services—Consolidated Credit. She’s a PFE-certified debt management professional, specializing in content that helps consumers manage debt, improve their credit, budget, and save for long-term goals.