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5 Ways to Buy a House with a Low Credit Score

Buying a home with a low credit score isn’t impossible, but it is more difficult. That said, there are some great mortgage programs for people with low credit. And your current credit score won’t be your credit score forever.
Buying a home with a low credit score isn’t impossible, but it is more difficult. That said, there are some great mortgage programs for people with low credit. And your current credit score won’t be your credit score forever.

After the subprime mortgage crisis left many Americans homeless, it became more difficult to qualify for a mortgage loan. The first thing any mortgage lender will check is your FICO score. There are many factors that banks evaluate when determining if someone qualifies for a loan, but credit score is the most important.

There is no single set minimum credit score to qualify for a mortgage. The minimum credit score you need to purchase a home will depend on the lender and the home loan you qualify for.

While a good credit score is one important factor in qualifying for a mortgage, it’s far from the only factor a lender will consider. If you can show you’ve re-established credit after a financial hardship, that will weigh in your favor. A clean credit report for the last 12 months will also help, as will a low debt-to-income ratio and steady employment history.

Here are some loans that people with less-than-stellar credit can qualify for, and some tips on improving your credit score.

1. FHA Loans

FHA loans are issued by private lenders and insured by the Federal Housing Authority. The FHA guarantee allows lenders to give loans to low and moderate-income buyers who may not otherwise qualify for a traditional loan.

FHA home loans allow some of the lowest credit scores of any mortgage, With a 10% down payment, buyers with a credit score as low as 500 can qualify. And with a credit score of 580 or above, your down payment will be just 3.5%.

If your credit score is below 580, however, it will be difficult to get a mortgage, even with an FHA lender. Buyers with a credit score of 580 or above are much more likely to be approved.

Learn More: The Complete Guide To FHA Loans By State

2. VA Loans

If you’re a veteran or service member, or married to one, you may be able to get a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans offer a number of benefits and are typically the best option for people who qualify.

The VA itself has no minimum credit score requirement, but like FHA loans, VA loans are issued by private lenders who set their own requirements. Many VA lenders require a credit score of 620 or higher, but some will go lower, especially if your score is above 580. Shop around to find a lender who works with people in your credit score range.

Besides flexibility with credit scores, VA loans also offer 100% financing, meaning no down payment is required. And VA loan recipients don’t have to purchase private mortgage insurance, or PMI, which can be a considerable cost.

Learn More: 5 Things to Know When Buying a Home With a VA Loan

3. USDA Loans & Rehab Loans

USDA loans are a good option for people with below-average credit scores. Insured by the U.S. Department of Agriculture, USDA loans have no down payment requirements and can help people who don’t qualify for a traditional mortgage. USDA loans are available in most places outside of major cities and have low rates, considering they have no down payment requirement.

There’s no published minimum credit score for USDA loans, but applicants with FICO scores of 640+ receive streamlined loan processing and qualify for the best rates. You may find a loan with a credit score below 640, but you must shop around to determine different lenders’ requirements

Learn More: USDA Rehab Loans: What Are They and How to Apply

4. Conventional Mortgages

Conventional mortgages require credit scores of 620 or higher; however, that’s not true across the board. Each lender has its own underwriting requirements and recently several lenders have designed programs for buyers with scores as low as 580.

If you’re a member of a credit union, you may qualify for a conventional loan with a lower credit score. Credit unions are non-profits owned by their members and often offer great rates and unique programs.

Learn More: What Is a Conventional Loan and When Should You Get One?

5. Improve Your Credit Score

People with low FICO scores will likely deal with higher interest rates and higher down payments. Most mortgage lenders have a floor for credit scores they won’t go below. Consider whether it makes sense for you to wait and build up your credit before applying for a mortgage.

Some ways to improve your credit score include:

  • Checking your credit report and reporting any errors;
  • Paying down credit card balances;
  • Requesting a “pay for delete” from any collections accounts;
  • Making on-time bill payments;
  • Consolidating debt payments
  • Getting all of your bills current; and
  • Getting a secured credit card or loan to build credit.

Learn More: How to Fix Your Credit Score in 6 Months

Are You Thinking About Buying a House?

If you’re considering buying a home, work with a real estate agent who understands your needs and situation. Clever Partner Agents are all experienced local agents who understand the different properties and loans available.

Contact us today and we’ll connect you with a real estate agent in your locale who can help you find a great home that fits your budget and mortgage requirements.


Reuven Shechter

Reuven Shechter is the Outreach Coordinator at Clever Real Estate, the free online service that connects you with top real estate agents to help save on commission. He spreads the word about Clever, disseminating studies to journalists and developing relationships with media outlets. Reuven is passionate about investing in real estate and creating lasting success for families. His writing has been featured in Max Real Estate Exposure, Leverage Marketing, and more.

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