How to Buy a House With Bad Credit: A Guide for Prospective Homeowners

84% of Americans see homeownership as a good thing. Owning a home can make you feel safe and secure in your personal environment.

The problem is that many people who want to be homeowners don’t feel like they have that opportunity because of their credit. They want to buy a house, but their credit score and report is lacking.

If learning how to buy a house with bad credit might be on your list of things to do, we are here to help you. Continue reading this article to learn if and how you can buy a house with bad credit.

Bad Credit Doesn’t Automatically Mean No

The good news is that having bad credit doesn’t necessarily mean you won’t be able to get approved for a home loan. In fact, there is such a thing as a bad credit home loan.

Before you go to apply for a bad credit loan, make sure you have bad credit in the first place. What you might consider a bad credit score isn’t necessarily bad credit. Check with a lender before you put yourself in the category of someone with bad credit.

What Is Bad Credit According to Mortgage Lenders?

While your credit might not be good enough to get a personal loan without collateral, that doesn’t mean it’s too bad to get a home loan. There actually isn’t a specific minimum credit score you need to have when you start looking for a new home.

Private mortgage lenders are able to set their own minimum requirements when it comes to credit scores. Keep in mind that government loans do give lenders a little peace of mind and often have lower requirements, but that still doesn’t mean that you’re going to be able to get a loan with a rock bottom credit score.

If your credit score is less than 500, you likely need to improve it before you’re able to get a loan.

Is Your Bad Credit That Bad?

There are all ways that your credit can be bad and the reasons can be endless. You might not even rightfully have credit problems. If you notice there are unfamiliar credit inquiries, you need to learn how to dispute a credit inquiry and get it taken off your report. They could be dragging down your score.

No two people have the same situation going on and while bad credit is one of the things lenders are going to look at, there are other factors that will play into whether you can get a home loan or not.

Some of the things that play a big part in whether you’re able to get a home loan are:

  • What you have to put as a down payment
  • If you have a large or small debt load
  • How much money you have coming into your household
  • If there are any collections accounts on your report

Each lender might have other requirements and things they want to see. Until you engage with a specific lender, you won’t know what you’re working with.

Types of Home Loans to Look Into When You Have Bad Credit

There are two different types of home loans you can look into. Those types of home loans are government-backed loans and conventional loans. The difference between these two loans is that one of the loans has government backing while the other one does not.

The types of loans you can look into are:

  • Conventional Loans
  • FHA Loans
  • VA Loans
  • USDA Loans

To qualify for a conventional loan, you usually need around a 620 credit score. It can vary depending on the lender, but this is usually what you’re up against.

The FHA, VA, and USDA loans are all backed by the government.

FHA loans, you’re usually looking at needing a 580 score, VA loans, you still need a 620, and USDA loans usually need at least 640.

Depending on how bad your score really is, one of the options might be better for you than another. If you want to get the best loan rates, it’s really wise to start working on improving your credit score.

Increasing Your Credit Score

Many people aren’t sure how to make their credit score go up. There are a lot of things that go into increasing your credit score, but these are the most impactful:

Payment History

Your payment history makes up 35% of your credit score. If there are some shaky times in your credit history, focus on not making those same mistakes again.

Credit Utilization

How much credit you’re using percentagewise plays a big role in your credit score. Credit utilization is actually 30% of your score. The higher the percentage of your available credit you’re using, the lower your credit score will dip.

Age of Credit History

The longer your credit history, the better for your credit score. Your credit age is 15% of your score.

Types of Credit

Creditors like to see that you have a good grip on managing different types of credit. Open credit card accounts, installment loans, and mortgages can help increase your credit score. This is 10% of your score.

How Much New Credit

If you’re taking out a lot of new credit, this can hurt your score. How much new credit you have is 10% of your credit score.

How to Buy a House With Bad Credit – Now You Know

Now you know how to buy a house with bad credit. You’ll be able to do what you need to do to become a homeowner if that is your goal.

Do you want to learn more about homeownership, personal finance, and other important topics? Keep reading our blog and we will be glad to help guide you through other situations.