How to Buy a House with Bad Credit: A Realistic Guide for 2024

Buying a house with a low credit score is challenging but achievable with the right strategy. While you'll face higher interest rates, options like FHA loans and larger down payments can help you qualify. The key is to thoroughly understand your credit report, correct any errors, and explore all available mortgage programs designed for borrowers with imperfect credit. Success hinges on preparation and working with a knowledgeable lender.

What Is Considered a "Bad" Credit Score for a Mortgage?

Your credit score, commonly known as a FICO score, is a numerical representation of your creditworthiness ranging from 300 to 850. Lenders use this score to assess risk. According to industry standards:

• Excellent Credit: 750 and above (qualifies for the best rates)
• Good Credit: 700 to 749
• Fair/Poor Credit: Below 700

Falling below the 700 threshold means lenders will view you as a higher-risk borrower. As mortgage expert Richard Redmond notes, a low score can put you at an immediate disadvantage. However, it does not automatically disqualify you.

How Can You Improve Your Credit Score Before Applying?

Before approaching lenders, you must scrutinize your credit report. You are entitled to a free annual report from each of the three major bureaus (Equifax, Experian, and TransUnion) via AnnualCreditReport.com.

1. Dispute Errors: A Federal Trade Commission study found a significant number of reports contain errors. If you find inaccuracies—like incorrect late payments or accounts—contact the reporting entity (e.g., a bank) to dispute them. Correcting these can boost your score.
2. Address Legitimate Negative Items: For accurate negative marks, the primary solution is time and consistent, on-time payments. Late payments are particularly damaging. Setting up automatic payments can help rebuild your payment history. While you cannot erase a legitimate history of credit card debt overnight, demonstrating a pattern of financial responsibility over several months will gradually improve your score.

What Mortgage Options Exist for Buyers with Bad Credit?

If your credit needs work but you're ready to buy now, several paths are available.

FHA Loans: A Federal Housing Administration (FHA) loan is a government-backed mortgage popular with first-time homebuyers and those with lower scores. The FHA requires a minimum score of 500, but your down payment depends on your score:

• Credit score of 580 or higher: Minimum 3.5% down payment.
• Credit score between 500 and 579: Minimum 10% down payment.

The trade-off is that all FHA loans require an Upfront Mortgage Insurance Premium (MIP) of 1.75% of the loan amount and an annual MIP, which increases your overall cost.

Larger Down Payment: Another strategy is to offer a larger down payment. Putting down 25% or 30% on a conventional loan, instead of the standard 20%, significantly reduces the lender's risk. This can make your application more attractive even with a lower credit score, though your interest rate may still be higher than average.

What Should You Expect with Interest Rates?

With a lower credit score, you will not qualify for the best available rates. Based on current projections, mortgage rates are expected to average around 6.3% through 2025. It is unrealistic to expect a return to the sub-3% rates seen during the COVID-19 pandemic. A higher rate means you will pay more interest over the life of the loan, so factoring this into your long-term budget is essential.

Buying a home with bad credit requires a clear-eyed approach. Review your credit report meticulously, explore government-backed loans like FHA, and consider saving for a larger down payment to strengthen your application. While the process demands more effort, homeownership remains an attainable goal with careful planning and professional guidance.