Buying a House with Bad Credit - Proven Strategies for Success

You can buy a house with bad credit, but your options are limited and rates will be higher. FHA loans accept scores as low as 580 with 3.5% down (or 500 with 10% down). VA loans have no official minimum score. Expect to pay 1-2% higher interest rates with bad credit, which adds $200-$400/month on a $300,000 loan. Improving your credit before buying saves thousands over the loan’s life.

What Counts as “Bad Credit”?

Credit Score Ranges

Range	Category	Mortgage Options
750+	Excellent	All options, best rates
700-749	Good	All options, good rates
650-699	Fair	Most options, higher rates
580-649	Poor	Limited options, much higher rates
500-579	Very Poor	FHA with 10% down only
Below 500	Bad	Very difficult to qualify

How Credit Affects Your Rate

$300,000 loan, 30-year fixed:

Credit Score	Approximate Rate	Monthly Payment	Total Interest
760+	6.25%	$1,847	$365,000
700-759	6.50%	$1,896	$382,600
660-699	6.875%	$1,970	$409,200
620-659	7.375%	$2,072	$446,000
580-619	8.0%+	$2,201	$492,400

The difference between 760 and 580 credit is $354/month and $127,000 over the loan’s life.

Loan Options for Bad Credit

FHA Loans

Best option for bad credit borrowers

Credit Score	Down Payment Required
580+	3.5%
500-579	10%
Below 500	Not available

Advantages:

Lowest credit requirements
Lower down payment
More lenient DTI limits
Allows recent credit events with explanation

Disadvantages:

MIP (mortgage insurance) for life of loan
Property must meet FHA standards
Loan limits apply

VA Loans

For veterans and military members

No official minimum credit score
Most lenders require 580-620
No down payment required
No monthly mortgage insurance
Competitive rates despite lower credit

If you’re eligible for VA, this may be your best option regardless of credit score.

USDA Loans

For rural and suburban properties

Minimum 640 score (for automated approval)
Manual underwriting possible for lower scores
Zero down payment
Low mortgage insurance

Limitation: Property must be in USDA-eligible area.

Non-QM Loans

Alternative for those who don’t fit traditional criteria

Bank statement loans
Asset-based loans
Recent credit event loans
Self-employed programs

Trade-offs:

Higher rates (1-3% above conventional)
Larger down payments (10-20%+)
Higher fees

Subprime Mortgages

High-risk lending option

These still exist but are less common after 2008:

Very high rates
Higher fees
Larger down payments
More predatory terms possible

Caution: Carefully review all terms and shop multiple lenders.

Compensating Factors That Help

What Lenders Consider Beyond Credit Score

If your credit is low, strengthen other areas:

Large down payment:

10-20% shows commitment
Reduces lender risk
May offset credit concerns

Low DTI:

Under 36% is strong
Shows payment capacity
Compensates for credit risk

Significant reserves:

6+ months of payments saved
Demonstrates stability
Reduces default risk

Stable employment:

Long tenure at current job
Same industry for years
Consistent or growing income

Explanation for credit issues:

Medical emergency (documented)
Job loss (with recovery)
Divorce (one-time event)
Identity theft (documented)

Manual Underwriting

When automated systems decline you, manual underwriting provides human review:

Available through:

FHA loans
VA loans
Some conventional programs

What underwriters consider:

Circumstances behind credit issues
Recent payment history
Overall financial picture
Compensating factors

Requirements are stricter:

Lower DTI limits
More reserves required
12+ months of clean payment history

How to Improve Your Approval Odds

Fix Errors on Credit Reports

20% of reports contain errors. Fixing them is free and can add 20-100+ points.

How to dispute:

Get free reports from AnnualCreditReport.com
Review all three bureaus
File disputes online or by mail
Include supporting documentation
Bureaus must investigate within 30 days

Pay Down Credit Cards

Credit utilization is 30% of your score and changes quickly.

Goal: Under 30% of limits (under 10% is ideal)

Example:

Card limit: $5,000
Current balance: $4,000 (80%)
Pay down to: $500 (10%)
Potential gain: 30-50 points in 30 days

Become an Authorized User

Get added to someone else’s well-managed card:

Old account (5+ years)
Low utilization
Perfect payment history

Impact: 10-30 points within 30 days

Don’t Apply for New Credit

Each application creates a hard inquiry:

Drops score 5-10 points
Too many signals credit-seeking
Wait until after closing

Pay Everything on Time

Payment history is 35% of your score:

Set up autopay for all bills
One late payment can drop score 60-100 points
Build 12-month clean history

Credit-Specific Challenges

Recent Bankruptcy

Bankruptcy Type	Waiting Period
Chapter 7	2 years (FHA), 4 years (conventional)
Chapter 13	1 year into plan (FHA), 2 years after discharge

Requirements after waiting period:

Re-established credit
On-time payments since bankruptcy
Stable employment
Explanation letter

Recent Foreclosure

Loan Type	Waiting Period
FHA	3 years
Conventional	7 years (3 with extenuating circumstances)
VA	2 years

During waiting period:

Rebuild credit
Save for down payment
Maintain stable employment

Collections and Charge-Offs

Strategies:

Dispute if inaccurate
Negotiate pay-for-delete
Paid collections are better than unpaid
FHA may require payment of collections over $2,000

High Credit Card Balances

Quick fix:

Pay down to under 30% of limits
Pay down highest utilization cards first
Score improves within 30 days of statement

Medical Debt

Good news:

FICO 9 ignores paid medical collections
New rules reduce impact of medical debt
Many lenders overlook small medical collections

Alternative Paths to Homeownership

Rent-to-Own

How it works:

Rent with option to buy later
Portion of rent builds toward down payment
Time to improve credit before buying

Risks:

May lose option money if you don’t buy
Terms often favor seller
Home may not appreciate as expected

Owner Financing

How it works:

Seller acts as lender
No traditional mortgage qualification
Negotiate terms directly

Risks:

Often higher interest rates
Shorter terms (5-10 years)
Balloon payments common
Due diligence on title essential

Co-Borrower or Co-Signer

Co-borrower:

Shares ownership and responsibility
Their income and credit count
Both on title and loan

Co-signer:

Guarantees the loan
Responsible if you default
May not be on title

Finding one:

Parents or family members
Must be willing to take risk
Their credit must be good

Down Payment Assistance

Many programs help despite credit challenges:

State housing agency programs
Local first-time buyer programs
Nonprofit assistance
Employer programs

Some have credit requirements; others are more flexible.

Working With Lenders

Find the Right Lender

Not all lenders work with lower credit:

FHA specialists
Credit union lenders
Community banks
Non-QM lenders

Shop multiple lenders within 14-45 days (counts as one inquiry).

Be Honest About Credit History

Lenders will find out anyway. Being upfront:

Builds trust
Allows for explanation
Helps find right program
Avoids surprises

Prepare Explanation Letters

For negative items, write brief, factual explanations:

What happened
Why it happened
What you’ve done differently
One page maximum

Get Pre-Approved

pre-approval with bad credit:

Shows you what’s actually possible
Identifies issues to fix
Gives you time to improve
Provides realistic budget

Should You Wait to Buy?

When to Wait

Consider waiting if:

Credit score is below 580
Recent bankruptcy or foreclosure
High DTI that can’t be reduced
No down payment saved
Rate would be 2%+ above market

Benefits of waiting:

Better rates (potentially save $50,000+)
More loan options
Lower monthly payment
Less financial stress

When to Buy Now

Consider buying now if:

FHA qualification is solid
Rents are rising faster than you can save
You have strong compensating factors
Property in your area is appreciating rapidly
Your credit issues are old and improving

Improvement Timeline

Starting Score	Time to Improve	Potential Gain
580-620	6-12 months	50-80 points
550-579	12-18 months	70-100 points
Below 550	18-24 months	100+ points

The math often favors waiting if you can significantly improve your score.

Frequently Asked Questions

What is the minimum credit score to buy a house?

500 with 10% down (FHA), 580 with 3.5% down (FHA), 620 for conventional. VA has no official minimum. Lower scores mean higher rates and fewer options.

Can I get a mortgage with a 500 credit score?

Yes, with FHA if you have 10% down payment. Options are very limited. Expect high rates and strict requirements. Most lenders set minimums at 580.

How much higher is the rate with bad credit?

Expect 1-2% higher than borrowers with excellent credit. On a $300,000 loan, that’s $200-$400 more per month and $70,000-$140,000 more over 30 years.

Should I pay off collections before applying?

It depends. Paid collections may not improve your score much on older FICO models. However, FHA may require it for collections over $2,000. Consult with your lender.

How long after bankruptcy can I get a mortgage?

FHA: 2 years after Chapter 7, 1 year into Chapter 13 plan. Conventional: 4 years after Chapter 7. VA: 2 years. You must have rebuilt credit during waiting period.

Will a co-signer help me get approved?

Yes, a co-signer with good credit can help you qualify. They must meet lender requirements and are equally responsible for the debt if you don’t pay.

Overcome bad credit to secure your new home