Buying a House with Bad Credit: What to Expect and How to Qualify

Buying a house with a low credit score is challenging but often possible. You may face higher interest rates, larger down payments, and additional fees. However, government-backed loans like FHA, VA, or USDA programs can provide pathways to homeownership for borrowers with scores as low as 500. Improving your debt-to-income ratio, saving for a substantial down payment, or adding a co-borrower can also strengthen your application. The key is to understand the extra costs and explore all available loan options.

What Is Considered a Bad Credit Score for a Mortgage?

Most mortgage lenders use the FICO score, a creditworthiness metric ranging from 300 to 850, to evaluate applicants. A FICO score below 580 is generally categorized as "poor." While a cash purchase eliminates the need for a credit check, financing a home requires a score that meets a lender's minimum threshold. It's crucial to know your exact score; under the Fair and Accurate Credit Transaction Act (FACTA), you can check your credit report from all three bureaus (Equifax, Experian, and TransUnion) for free annually.

What Are the Extra Costs of a Mortgage with Bad Credit?

Lenders view a low credit score as an indicator of higher risk, which they offset by adjusting the loan's terms and cost.

• Higher Interest Rates: Your mortgage's interest rate—the percentage charged on the borrowed amount—could be significantly higher. Even a small rate increase can cost tens of thousands of dollars over the loan's life.
• Larger Down Payment Requirements: You might be required to put down more money upfront. While a conventional loan can require as little as 3% down, a lender might insist on 10% or even 20% from a borrower with poor credit to mitigate their risk. On a home priced at the U.S. median value (approximately $365,000 as of early 2025), a 20% down payment equals about $73,000.
• Higher Fees: You may encounter elevated origination fees (typically 0.5%-1% of the loan amount for processing) and underwriting fees (often $500-$1,000) to cover the lender's cost of analyzing a higher-risk application.

How Can You Buy a House with Bad Credit?

If improving your score before buying isn't feasible, several strategies can improve your eligibility.

1. Explore Government-Backed Loan Programs These programs often have more flexible credit requirements than conventional loans.

• FHA Loans: Insured by the Federal Housing Administration, these loans may accept credit scores as low as 500 with a 10% down payment, or 580 with a 3.5% down payment.
• VA Loans: Available to eligible veterans and service members, VA loans are guaranteed by the Department of Veterans Affairs. They often have no minimum credit score set by the agency, though lenders typically require a score of 620 or higher. They also usually require no down payment.
• USDA Loans: For homes in designated rural areas, USDA loans from the Department of Agriculture may offer no-down-payment options, with lender credit requirements often around 640.

2. Strengthen Your Financial Profile

• Save for a Larger Down Payment: A substantial down payment reduces the lender's risk and demonstrates financial discipline.
• Lower Your Debt-to-Income Ratio (DTI): Your DTI is the percentage of your gross monthly income that goes toward debt payments. Paying down credit cards or other loans can lower your DTI, making you appear more capable of handling a mortgage payment. Based on our experience assessment, a DTI below 43% is generally target.
• Consider a Co-Borrower: Adding a co-borrower with a strong credit history and income to your application can significantly enhance your qualifying power. Remember, this person will share legal ownership of the property.

How Can You Improve Your Credit Score?

While buying a home with current credit is possible, improving your score is the most effective way to secure better terms. Key actions include:

• Do check your credit reports for errors and dispute any inaccuracies.
• Do pay all bills on time, as payment history is a major factor in your score.
• Do keep your credit utilization ratio—the amount of credit you're using compared to your total limits—below 30%.
• Avoid opening several new credit accounts in a short period.
• Avoid making multiple loan applications outside a concentrated shopping period, as numerous hard inquiries can lower your score.

Success in securing a mortgage with less-than-ideal credit hinges on a clear understanding of the associated costs and a proactive approach to exploring alternative loan programs and strengthening your overall financial application.