How to Buy a Home with Bad Credit?

When you have a low credit score, it can be harder to get a mortgage, but don’t give up — there are still ways for you to buy a home.

Applying for a mortgage with a bad credit score can be incredibly difficult and frustrating. At times, it might feel like the system is just not made for you. And in some ways, that is accurate — even if you know that you’ll be able to pay your monthly mortgage payments, lenders and banks may not be willing to lend to you simply because of that one ever-present number: your credit score. 

However, just because you have a “bad” credit score doesn’t mean your dreams over homeownership are finished. Fortunately, there are still options for you to buy a home. In this blog post, we’ll examine all the different ways you can buy a home with bad credit. 

Mortgages for people with low credit scores

There are several mortgages that are specifically designed for people with lower credit scores. Many of these are government-backed programs that were designed to increase rates of homeownership in the U.S. or to expand access for certain groups of people. 

Below are the mortgage programs that can work well for people with low credit scores: 

FHA Loans

One of the best programs for people with low credit scores is the Federal Housing Administration (FHA) loan program. That’s because FHA loans only require a score of 580 and a down payment of 3.5%. If you have a larger down payment of 10%, you can even get approved for an FHA loan if your credit score falls between 500-579. 

According to WalletHub, about 15% of Americans have a credit score between 500-600. The FHA loan program can be a perfect step for them to become homeowners. 

In order to qualify for an FHA loan, there are a few other criteria that you must meet. They are: 

  • You must have a debt-to-income ratio of less than 50%. In other words, all your monthly debt payments cannot add up to more than half of your income.  
  • You must be able to prove employment status and income. This will require submitting specific documentation to your lender. 
  • You must show two years of employment or education. If you cannot document two years of previous employment, you will need to demonstrate that you were participating in higher education or military service during that time. 
  • You must live in the home for at least one full year. The FHA program is intended for those buyers who will use the property as their primary residence. 

VA Loans

The Veterans Administration (VA) loan program is an exceptionally good choice for those who qualify. Not only does the VA loan have zero down payment requirement, it also is available for people with a credit score of 620 or above. 

The only downside is that there are limits to how much you can borrow with a VA loan. However, for most home buyers, the limits will not affect their home search. You can find out the VA loan limits in your area here

To qualify for a VA loan, here are the main requirements: 

  • You must be a U.S. military veteran or a surviving spouse. In general, this means you served for at least 90 days and were honorably discharged or you are the spouse of a veteran who is missing in action, held as a prisoner of war, or who has passed away.
  • You must qualify according to the mortgage lender’s standards. These standards cover factors like your employment status, income, and debt-to-income (DTI) ratio.
  • You must live in the home for at least one full year. The VA loan program is intended for those buyers who will use the property as their primary residence. 

USDA Loans 

Like VA loans, the United States Department of Agriculture (USDA) loan program allows you to buy a home with no down payment and a credit score of just 620 or above. According to WalletHub, about 22% of Americans have a credit score between 600-700 and the USDA loan program can provide significant help to many of the prospective homeowners in this category. 

The USDA loan program was created to help people in rural areas purchase a home that would be their primary residence. The loans can only be given for homes within eligible rural neighborhoods. You can see if a home is eligible by searching for the address on the United States Department of Agriculture website

In order to qualify for a USDA loan, here are the requirements: 

  • Your monthly mortgage payment should be less than 29% of your income. The mortgage payment includes your principal, interest, insurance, and taxes. 
  • Your DTI should be less than 41%. In some cases, if your credit score is higher, you may be able to qualify with a higher DTI. 
  • You must purchase a home in a qualifying rural area. Use the link above to confirm whether your home is eligible. 
  • You must plan to live in the home full time. The USDA loan program is intended for the purchase of primary residences only. 

Non-QM Loans 

Non-qualified mortgage loans, or Non-QM loans, have an important place in the home financing industry. They allow people with slightly different or unusual financial circumstances to get into a home. For those with bad credit caused by a recent foreclosure, short sale, or bankruptcy, a Non-QM loan could be the right fit. 

These loans can also be a good fit for those without enough credit history to be approved for a traditional mortgage loan. For example, if you don’t have any open credit lines and have no credit score on file with the major credit bureaus, a non-QM loan might work for you. 

Because these loans are intended for people with slightly different financial situations, they typically require a little more documentation. Here is a list of what you’ll be required to provide your lender in order to qualify for a Non-QM loan: 

  • Your income
  • Your assets
  • Your current employment status
  • Your monthly debt payments
  • Your alimony and/or child support payments
  • For self-employed borrowers, your personal tax returns for the past year
  • For business owners, your business tax returns for the past year plus a signed “profit and loss” statement

Mortgage alternatives for people with lower credit scores

What if you are not ready for a mortgage? Let’s say you want a little more time to improve your credit score and save up for a down payment so you can get approved on excellent terms in a few months or years?  

That’s totally fine! In fact, there are some great alternatives to getting a mortgage, including Divvy Homes

At Divvy, our mission is to make homeownership accessible to everyone. Our program is unique because we allow you to move into the home you want and live in it while you continue to improve your financial situation. We buy the home and you rent it from us — but the best part is we actually help you accomplish your financial goals.

We will connect you with a free credit counseling service so you can rebuild your credit. Meanwhile, every month your payment to Divvy will include a savings portion that we hold for you until you’re ready to buy the home. After 3 years, this savings will typically equal 5-10% of the home’s value, which means you’ll have enough for a down payment. 

Divvy is a great option for those who aren’t yet ready to get a mortgage. You get to start your journey to homeownership and live in your dream home. Plus, you can buy back the home from us at any time. 

Sounds interesting? Click here to learn more and sign up for Divvy.

2 thoughts on “How to Buy a Home with Bad Credit?

  1. Need Information in referrence to the soft credit pull for i am working very hard to rebuild my score and do not need any more inquires on the report. I am very much interrested in the program and have questions.


  2. VA loans actually don’t have a limit anymore. As long as you have full entitlement and meet DTI requirements, you can get as large of a VA loan as you want. If you already have an outstanding VA loan and therefore don’t have full entitlement, then you are limited on the maximum VA loan you can receive.

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