Buying a house with bad credit

5-min read

If the thought of buying a home has you nervous because your credit is less than perfect, don’t give up hope. It may be possible to buy a home with bad credit. Read on to discover how understanding your credit score and improving your financial health can lead to homeownership, even with poor credit.

How to buy a house with poor credit

Buying a home with a low credit score (or no credit at all) can be a challenge. For instance, you’ll need a score of at least 640 to be considered for a U.S. Bank loan. But there are things you can do to increase your chances of getting approved for a mortgage, like monitoring your credit, paying your bills on time, paying down debt and more. And there are lending options for a variety of credit scores and situations, too.

Keep an eye on your credit.

It’s a good idea to find out where you’re starting from when it comes to your credit score and shopping for a mortgage. If you’re a current U.S. Bank client, you can check your credit score for free with our tool so you know where you stand. And anyone has access to check their report once a year for free at annualcreditreport.com. When reviewing your credit report, look for errors or anything else that doesn’t accurately reflect your true credit history. If you find anything, dispute it with the credit bureau or the creditor reporting the information.

Pay your bills on time.

Payment history is an important factor when it comes to your credit score. Be sure your car payment, credit card and other debt payments post to your accounts by the due dates in order to boost this part of your score. A higher credit score can improve your chances of qualifying for the best possible rate.

Work on paying down debt.

Your debt-to-income (DTI) ratio is the amount of recurring debt you have, not including things like utilities or cell phone bills, relative to your monthly income. It’s calculated by taking your total monthly debt payments and dividing that by your gross monthly income. Lenders use this ratio to make sure you can comfortably afford your new mortgage. You should aim for a DTI ratio of 45% or less. However, you may qualify for a mortgage with a higher ratio in some instances, depending on your qualifications. Working on paying down your debt is a good way to lower your DTI ratio.

Bring on a co-signer.

Another option for buying a house with bad credit is having someone co-sign on the loan with you. A co-signer may be able to use their income and assets to help you qualify for a mortgage. This reduces your risk to the lender by giving them someone else to fall back on for payments should you ever default on the loan. It’s important to note what a huge responsibility this is for a co-signer, though. It’s even more reason to be sure to make your payments on time so their credit is protected.

Save up for a larger down payment.

One of the benefits of saving for a down payment of 20% or more is that you’ll have a smaller monthly mortgage payment (because you paid for more of the house upfront). A larger down payment is a sign that you’re financially stable and a good credit risk which means you’ll usually get a better interest rate as well. And depending on the type of loan, you may not have to pay for private mortgage insurance (PMI). So, while you’ll pay more upfront, you’ll have lower monthly payments and pay less interest over the life of the loan.

Avoid hard credit inquiries.

A hard credit inquiry is when a lender or company does a credit check to determine how risky you are as a borrower. Applying for a mortgage, personal loan, credit card (including retail cards) or auto loan all lead to “hard pulls” and can lower your credit score. You can protect your credit score by limiting the amount of hard credit inquiries on your credit report.

Get a little closer to your new home.

Prequalification helps you see how much you might be able to borrow, without affecting your credit score.

Prequalify

Understanding your credit score

Your credit score can range from 300 to 850. Simply put: the higher your score, the better. Credit scores are maintained by the national credit bureaus and include debt like credit cards, auto loans and student loans. The ranges used by credit reporting agencies can vary slightly, but the following from TransUnion® will give you an idea of what the numbers mean:

Credit scores
850 – 781: Excellent
780 – 720: Very good
719 – 658: Good
657 – 601: Fair
600 – 300: Poor

There are many factors that can influence your score, such as payment history, amounts owed, length of credit history, amount of new credit and types of credit. A credit score based on these factors gives lenders a quick way to see how likely you are to pay your future bills – like your mortgage, for example

Improving your credit score

There are several things you can do to maximize your credit score before you begin house hunting. The specific steps required will depend on your unique credit situation, but with some time and effort, you’ll be ready to start enjoying the perks of an optimal credit score. Whether you’re building your credit from scratch or rebuilding after some setbacks, here are some credit-boosting tips that can help:

Pay your entire balance on time each month.
Use credit cards responsibly.
Stay below your credit limits.
Get out in front of bills, loans and debt.
Review your credit report every year.
Don’t open too many credit card accounts at once.

Some benefits to improving your credit score may include access to more loan options and a better mortgage interest rate. But, your credit score isn’t the only deciding factor when it comes to getting a mortgage. Lenders will also consider your income, employment history, the amount of mortgage you’re requesting and your down payment.

Home loan options for first-time buyers with bad credit

While it may be a bit more challenging to get a mortgage with bad credit, it’s not impossible. Here are some of the loan options available to buyers with bad credit:

Federal Housing Administration (FHA) loans: Since they’re government-backed, FHA mortgages typically have lower credit requirements than conventional fixed-rate loans and adjustable-rate mortgages (ARMs). Even with a weaker credit score, you may only be required to put 3.5% down. However, putting less down could result in a higher interest rate. Keep in mind that FHA loans require mortgage insurance, too, which protects the lender against any loss if you fail to pay your mortgage.
Veterans Affairs (VA) loans: The flexible qualification guidelines of VA loans may make it possible to buy a home if you’re a service member, veteran or eligible surviving spouse. Even with no down payment, VA loans do not require mortgage insurance. Because the VA guarantees a portion of your loan, you save on this monthly expense.

Our mortgage loan officers can help you figure out what mortgage options best fit your credit situation.

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Disclosures

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.

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