By Grant Edrington – Updated May 31, 2023

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 of 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. If you haven’t made up your mind yet on buying vs. renting, learn about the differences here. Here’s what we’ll cover in this article:

• What is the Lowest Credit Score Needed to Buy a House?
• Home Loans for People With Poor Credit Scores
  • FHA Loans
  • VA Loans
  • USDA Loans
  • Non-QM Loans
• How to Improve Your Credit Before Buying a Home
  • Check Your Credit Report and Score
  • Make All Payments on Time
  • Be Mindful of Credit Utilization and Consider Asking for a Credit Limit Increase
  • Avoid Closing Credit Cards
  • Become an Authorized User on Someone Else’s Credit Card
  • Disputing Credit Report Errors 
• Divvy Offers a Path to Homeownership for People with Lower Credit 
• FAQs About Buying a Home With Bad Credit

What is the Lowest Credit Score Needed to Buy a House Through a Mortgage? 

Typically, a credit score of 580 or higher is considered the minimum requirement for purchasing a home through a mortgage. With a FICO score of 580, you could be eligible for government-backed loans like FHA loans or VA loans, which are offered by many leading lenders. 

However, conventional loans, which are the most widely used type of mortgage, require a credit score of 620 or above. For USDA loans, the minimum credit score required is 640, although the program doesn’t demand a down payment. With that in mind, it could be beneficial to check if your location qualifies for USDA eligibility.

Loan Program	Credit Score	Minimum down payment required with score
FHA Loan	500	10%
FHA Loan	580	3.5%
VA Loan	580*	0%
Conventional Loan	620	3%
USDA Loan	640*	0%

Credit scores are generally categorized into ranges that indicate a borrower’s creditworthiness, or a lender’s willingness to trust you to pay your debts. The most widely-used credit scoring system is FICO, whose scores range from 300 to 850. Here’s a breakdown of what lenders typically consider poor, fair, good, very good, or excellent credit:

• Poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very Good: 740 to 799
• Excellent: 800 to 850

Lenders use credit scores as an indicator of how likely you are to repay your debt on time. They consider higher credit scores to be an indication of lower risk and, therefore, more likely to be approved for a loan. If your credit score is low, it could be challenging to get approved for a loan, and you might end up paying higher interest rates or fees to compensate for the risk that the lender may be taking on.

In addition to credit score, lenders also look at other factors to determine your creditworthiness, including your income, employment history, debt-to-income ratio, savings, and assets. Lenders consider all of these factors to get a comprehensive picture of your financial situation before deciding to approve your loan. That’s why it’s essential to have a good credit score and a healthy financial profile to increase your chances of being approved for a loan with more favorable terms.

Home Loans for Those with Bad Credit Scores

There are several mortgage loans 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 loan 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. 

The FHA loan program can be a perfect step for you to become a homeowner. 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 43%. 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. The VA loan program has a zero down payment requirement, however, credit requirements may depend on your lender.

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 credit score, 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 640 or above. The USDA loan program can provide significant help to many 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 eligibility map. 

In order to qualify for a USDA loan, you’ll need to meet certain 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. 
• Your adjusted gross income cannot exceed 115% of the median income in the area where you plan to buy. To confirm eligibility, check the USDA property eligibility map. 

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 and time to close. 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

Are you a first-time home buyer? Learn more about nationwide first-time home buyer programs you may qualify for.

How to Improve Your Credit Before Buying a Home

Before we dive into tips to help improve your credit score, it’s essential that you understand the main components that determine your credit score. Credit scores are calculated based on factors such as payment history, credit utilization, length of credit history, types of credit accounts, and new credit inquiries. These factors can affect your score differently, and each has a varying degree of impact on your overall credit score.

If you’re looking to buy a home, having a solid credit score is critical for increasing your chances of being approved for a loan with more favorable terms. Here are some tips to improve your credit score:

Check Your Credit Report and Score

Did you know that over a third of credit reports contain errors? These errors can have a significant impact on your credit score, with some errors potentially lowering your score by more than 100 points. 

To potentially improve your credit score, it’s crucial to review your credit report for inaccuracies before applying for a mortgage. You can quickly preview your credit report on the AnnualCreditReport.com website. If you find any errors, make sure to have them corrected promptly by contacting the appropriate credit bureau to dispute any inaccuracies. 

Make All Payments on Time

Making timely payments to your creditors is an excellent way to boost your credit score. You may start seeing improvements within 30 days. If for some reason, you can’t pay all your bills in full each month, make sure you make at least the minimum payment on each. This will still count as an on-time payment and help maintain a positive payment history.

Be Mindful of Credit Utilization and Consider Asking for a Credit Limit Increase

Another big factor that affects your credit score is your credit utilization ratio, which is the amount of credit you’re using compared to your credit limit. It’s recommended to keep your credit utilization below 30% of your total credit limit to maintain a good credit score.

To improve your credit utilization ratio, consider asking for a credit limit increase from your credit card issuer. However, don’t use the extra credit as an reason to overspend.

To help boost your credit score overall, it’s also important that you understand the various types of credit card payments:

• The minimum payment is the smallest amount you can pay to keep your account current. 
• The statement balance payment is the amount you need to pay to avoid interest charges on your outstanding balance. Paying over the statement balance can help reduce your credit utilization ratio and boost your credit score.
• In some instances, your statement balance may be less than the actual current balance on your card – transactions that have not been included in your billing period but will count toward next month’s balance. Paying over the statement balance means you will not bring those charges into the next month and, conversely, will not pay any interest on that balance. Paying over the statement balance can also boost your credit score and lower your credit utilization ratio. 

Avoid Closing Credit Cards

Why shouldn’t you close credit card accounts? Even if you don’t use them, closing credit card accounts can reduce available credit, making your utilization ratio go up, which, in turn, can make your credit score go down.

When you close credit card accounts, you also affect the average age of your credit accounts, which can hurt your credit score. Accounts you’ve held for a long time help establish your credit history and elevate your credit score. Having a variety of credit accounts is also good for your credit score, so if you close your credit cards, it could negatively impact your credit mix.

On the other hand, opening new credit card accounts could improve your credit score by increasing your overall credit limit and decreasing your credit utilization ratio. In addition, having different types of credit accounts –such as credit cards, car loans, and mortgages – can also help boost your credit score. Just keep in mind that opening new accounts could decrease your age of credit, which is a factor for your score. We also don’t recommend opening new cards just for the sake of opening them and increasing your credit limit.

Become an Authorized User on Someone Else’s Credit Card

Looking for another way to improve your credit score? Ask a family member to add you as an authorized user on their credit card account. This way, you can benefit from their on-time payments, which can boost your credit score.

But, before you become an authorized user, make sure the primary account holder is reliable and makes timely payments. If they miss a payment, it can affect your credit score too, and you don’t want that.

Disputing Credit Report Errors

If you notice any mistakes on your credit report, it’s crucial to dispute them immediately. Disputing errors with credit bureaus can correct inaccuracies that might be harming your credit score. You can contact the credit bureau in writing to dispute errors and provide any supporting documents, if necessary. To make sure these errors have been fixed, follow up with these credit bureaus where you spot inaccuracies on your credit report. Remember, disputing credit report errors is your right, and it can make a significant impact on your credit score and financial future.

Divvy Offers a Path to Homeownership for People with Lower Credit 

What if you are not ready for a mortgage? Divvy Homes is an excellent option if you’re still working to improve your credit score, as you may not yet qualify for a traditional mortgage. While we look at a range of criteria when reviewing applicants, Divvy’s minimum credit score requirement is 550, which means you can get into your dream home now, even if your credit score needs a little work. More than half of current Divvy customers have cited credit as their biggest barrier to securing a traditional mortgage. 

What’s more, we provide applicants and residents access to partners to help find ways to improve their credit scores. Meanwhile, every month your Divvy payment could include a savings portion that can grow into a down payment if you choose to purchase the home. If you decide you don’t want to purchase your home from Divvy, you can take your savings with you, minus a relisting fee of 2% of the initial purchase price.

At Divvy, our mission is to make homeownership accessible to everyone. Learn more about how Divvy works and start planning for your forever home today. 

Wondering if rent-to-own or a mortgage is the best option for you? Learn more about the differences between the two.

FAQs About Buying a Home With Bad Credit

Is a credit score of 500 good enough to buy a house?

Generally, a credit score of 500 or below is considered poor, and it may be challenging to qualify for a mortgage loan with this score. However, some lenders may offer government-backed loans like FHA or VA loans, which have lower credit score requirements.

What credit score is needed to buy a $300,000 house?

To purchase a $300,000 house, you’ll typically need a credit score of 620 or above, as that’s the minimum most lenders have for a conventional loan. However, keep in mind that other factors, such as your income, employment history, and debt-to-income ratio, may also impact your ability to qualify for a mortgage.

What is the first step to buying a house with bad credit?

The first step to buying a house with bad credit is to confirm your credit score and review your pre-approval odds and loan options with a lender. From there, check your credit report for errors and, if your lender advises, dispute any inaccuracies to help improve your score and options. You can also work on improving your credit score by paying bills on time and reducing credit utilization.

Can I buy a house with no down payment?

Yes, it’s possible to buy a house with no down payment by qualifying for a VA or USDA loan. However, these loans have strict eligibility requirements, and it’s crucial to research and understand the terms and conditions before applying. 

Sources

• U.S. Department of Housing and Urban Development: FHA Loans
  (https://www.hud.gov/buying/loans)
• U.S. Department of Veterans Affairs: VA Home Loans
  (https://www.benefits.va.gov/homeloans/)
• U.S. Department of Agriculture – Rural Development: Single Family Housing Guaranteed Loan Program
  (https://www.rd.usda.gov/programs-services/single-family-housing-programs/single-family-housing-guaranteed-loan-program)
• U.S. Department of Agriculture – Rural Development: Property Eligibility
  (https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp)
• FICO: FICO Score:
  (https://www.fico.com/en/products/fico-score)
• U.S. Department of Veterans Affairs: VA Home Loan Limits
  (https://www.va.gov/housing-assistance/home-loans/loan-limits/)
• U.S. Department of Agriculture – Rural Development: Property Eligibility
  (https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp)
• AnnualCreditReport.com
  (https://www.annualcreditreport.com/index.action)
• U.S. Department of Veterans Affairs: VA Guaranteed Loan
  https://www.benefits.va.gov/BENEFITS/factsheets/homeloans/VA_Guaranteed_Home_Loans.pdf
• Rocket Mortgage: USDA Loans
  (https://www.rocketmortgage.com/learn/usda-loans)
• Consumer Reports: Consumer Reports Investigation Finds More Than One-Third of Consumers Found Errors in Their Credit Reports
  (https://www.consumerreports.org/media-room/press-releases/2021/06/consumer-reports-investigation-finds-more-than-one-third-of-consumers-found-errors-in-their-credit-reports/)