Written on behalf of Tru Housing Solutions - Area Leader in Owner Financing - SWLA - SETX
Can You Buy a Home with Bad Credit?
Absolutely, you can buy a house even if your credit isn't perfect. At Tru Housing Solutions, we understand that life happens, and your credit score shouldn't stand in the way of homeownership. There are several mortgage programs designed to work with lower credit scores, including conventional loans and FHA loans. While many homebuyers have excellent credit (with a median score of around 770), there are still plenty of options for those whose scores are a bit lower.
How Do Mortgage Lenders Evaluate Credit?
When you apply for a mortgage, lenders take a close look at your credit history to assess your creditworthiness. They use data from the three major credit bureaus: Equifax, Experian, and TransUnion. Usually, they consider the middle score of the three and review your credit report for your total debt load, as well as any red flags like late payments or defaults.
What Do Lenders Consider a Low Credit Score?
Credit scores play a significant role in whether your mortgage application gets approved. Here’s how the FICO scoring model breaks down:
Below 580: Poor
580-669: Fair
670-739: Good
740-799: Very Good
800 or Above: Excellent
Types of Bad Credit Home Loans
If your credit score is on the lower side, don't worry—there are still several loan options available:
Conventional Loans: Typically, you’ll need a minimum credit score of 620 (Fannie Mae) or 660 (Freddie Mac) with a 3% down payment.
FHA Loans: The FHA (Federal Housing Administration) is more flexible with credit requirements. Prospective buyers can qualify with a credit score as low as 580 with just a 3.5% down payment, or even with a score as low as 500 if they can put down 10%.
VA Loans: There is no official credit score requirement for military members and veterans, though lenders often prefer a score of at least 620.
USDA Loans: Designed for rural homebuyers, these loans traditionally require a minimum credit score of 640.
Owner Financing: For those struggling with traditional financing options, owner financing can be a viable alternative. It allows buyers to purchase a home directly from a seller, builder, or local community-oriented lending company, often with more flexible credit requirements and terms tailored to fit individual needs. Traditionally requires a minimum credit score of 525.
How to Secure a Mortgage with Bad Credit
Getting a mortgage with bad credit might take a little extra effort, but it’s definitely doable. Here are some steps to help you along the way:
Check Your Credit Report for Errors: Fixing any errors on your report can boost your score and improve your chances of approval.
Pay Down or Pay Off Debt: Reducing your debt load can improve both your credit score and your debt-to-income ratio.
Shop Around: Don’t settle for the first offer—compare terms and rates from several lenders to find the best deal.
Find a Co-Signer: If you can, find a co-signer with better credit to strengthen your mortgage application.
Consider a Rapid Rescore: This service can quickly update your credit score with recent improvements, though it does come with additional costs.
How Much Will a Low Credit Score Cost You?
Unfortunately, a lower credit score is seen as higher risk and typically an elevated interest rate. Here’s an example of what monthly payments and total interest might look like over a 30-year loan for $400,000:
FICO Score Range | APR | Monthly Payment | Total Interest Paid |
760-850 | 6.254% | $2,464 | $487,007 |
700-759 | 6.476% | $2,522 | $507,906 |
680-699 | 6.653% | $2,569 | $524,715 |
660-679 | 6.867% | $2,626 | $545,208 |
640-659 | 7.297% | $2,741 | $586,929 |
620-639 | 7.843% | $2,891 | $640,903 |
Bottom Line
Yes, you can buy a house with bad credit, and at Tru Housing Solutions, we're here to help you find the right path. Improving your credit score before applying can make a big difference, but even if your score is low, there are still ways to achieve your dream of homeownership.
FAQ
Will You Pay More for Mortgage Insurance with Bad Credit?
It depends on the type of mortgage. For conventional loans, private mortgage insurance (PMI) rates are higher with lower credit scores. FHA loans have mortgage insurance rates based on the loan term, amount, and down payment—not your credit score.
Are Mortgage Rates Higher with Bad Credit?
Yes, they typically are. Lenders see lower credit scores as a higher risk, which translates to a higher interest rate. But remember, Tru Housing Solutions is here to help you navigate these challenges and find the best solution for your situation.
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