Can You Buy a House with Bad Credit?

As , CNBC reports those who are looking to buy a home should have a credit score of at least 760 to qualify for the best interest rates, but that doesn’t mean you can’t purchase one if your score is lower than that. The higher score you have, the lower the interest rate and the less you’ll pay over the life of the loan.buy a house with bad credit

If you aren’t sure what your credit score is but are assuming it’s poor, be sure to check with all three credit bureaus so that you know what you’re working with. Keep in mind that lenders will look at your Equifax, Experian, and TransUnion scores, and of the three, they’ll throw out the highest and lowest, using the middle score. While 760 isn’t the minimum score to buy a house, anything under 670 is generally considered “subprime,” and if it’s less than 580, “bad.”

While it’s best to increase your score to the highest possible number before attempting to buy, there are things you can do to potentially purchase now.

Come Up with a Large Down Payment

The larger the down payment you have to make on the home, the better as it lowers the risk to the lender by reducing the amount. At least 20 percent is ideal, but you’ll want to put down as much as you comfortably can as it will show the potential lender that you are willing to make a significant investment, are committed to the home, and follow up with the monthly mortgage payments. If you don’t have much cash available and already own a home now, be sure to determine the answer to the question, “What is my home worth?” as you may be able to make a high enough profit to use for your down payment.

Increase Your Available Credit

If you can increase the amount of credit you have available, it will quickly improve your score. That can be done by requesting credit limit increases and/or paying down your balances. Either will decrease your total credit utilization, which has a significant impact on your credit score. Most credit card companies will allow you to request an increase without causing a hard pull on  your credit, which can slightly lower your score.

Shop Multiple Lenders

It’s important to shop around when searching for the right lender as not only will you want to get the best interest rate possible, but each one has its own particular credit requirements. While there are some that require at least a “good” credit score, some lenders consider a score of 650 or less as “bad,” while for others, it’s 630. Be sure to submit your application with a short period – inquiries taking place over 45 days won’t hurt your credit score as much as the scoring models will see it as shopping around.

Consider an FHA Loan

It can be possible to obtain an FHA loan with a credit score as low as 500 as these loans typically have looser credit requirements, although you need to have at least a 10 percent down payment if it’s less than 580. While some lenders may help cover closing costs, that usually means paying a higher interest rate in addition to private mortgage insurance (PMI) when putting down less than 20 percent.

Look at Homes with Prices at the Low End of Your Budget

The lower the home’s price tag, the higher the chance that you’ll get approved for a mortgage. The general rule is that the total cost of your monthly mortgage payment, property taxes, and insurance should be no more than 28 percent of your pre-tax income. Use that figure and look for homes with prices under that for the best chance of getting approved for a home loan.