Before you purchase a house, you will need to apply for a mortgage. Mortgage applications ask buyers how much they can afford to put on a down payment, what their credit scores look like…and that’s where many buyers abandon their hopes.

Don’t abandon hope just because your credit scores are lower than average. People with “bad credit” can still buy a home; they might just have limited loan options. Borrowers may also be able to improve their credit scores by taking a few simple steps.

Credit Score Basics

Credit scores play a big part in what mortgage loans are available to you, but what is a credit score in the first place?

Credit scores measure your financial history and your ability to make payments on loans, credit card balances, and other financial obligations. Lenders use credit scores to determine whether or not a borrower may be at risk to default on a loan. If they see a borrower with “bad credit,” they may consider them a high-risk borrower. High-risk borrowers often face higher interest rates, high mortgage insurance premiums, or the inability to get a mortgage in the first place.

What is considered a “good” credit score?

FICO, a data analytics company, gives out credit scores on a scale from 300 to 850. A person with a credit score above 700 can breathe easy. Most people have a credit score within the 600 to 700 range. If your credit score is below 600, don’t worry. You can still afford a house with some lenders.

How to Improve Your Credit Score

If you have some time before you apply for a mortgage, consider improving your credit score first.

What factors affect credit scores?

Before you improve your credit score, you have to know what led to your current score in the first place. Overall, credit scores determine how likely you are to pay back financial obligations. FICO credit scores use the following factors to determine that risk:

  • Payment history (on credit cards, student loans, utility bills, rent payments, etc.)
  • Credit card debt (versus your credit spending limit)
  • Credit history (and when you opened your first account)
  • Credit mix (the more types of credit, the better)

Hopeful buyers can use these factors to create a strategy for improving their credit score. It is possible to increase your credit score in as little as six months.

Ways to Improve Your Credit Score

If you want some great interest rate and loan options, you need to raise that credit score. Here are some ways to do that.

Pay credit card debt.

Even if you pay a portion of the outstanding balance, you will make an impact. Remember, credit scores consider the ratio of your debt to your credit limit. If you can decrease that ratio, you will see a higher score.

Pay off other debts.

FICO also looks at your ability to back by student loans, past mortgages, and other debts. Settle any debt that you have now in order to improve your credit score.

Get in the habit of paying your bills each month.

If you do not start paying your bills on time now, you won’t see a better credit score tomorrow. Budget your monthly spending so that you can pay your bills on time. If you can allocate more money to your bills each month, you will see a reward as your credit score starts to rise.

Check for errors on your credit report.

Sometimes, credit scores are low due to the actions of another person. Negligence, identity theft, or errors on your credit report could have a big impact on your credit score. When you get your credit score, pay close attention to the factors that contribute to your score. If you see an error, reach out to a creditor immediately. The sooner they can solve the dispute, the sooner you can get the credit score you deserve.

Home Loan Options for Buyers With Low Credit Scores

If the road to good credit is long, but the need to buy a house now is dire, you have options. The most forgiving loan programs give mortgages to buyers whose credit scores can’t make it past 500. Do not let credit score requirements keep you from buying a home!

FHA Loans for Buyers With Bad Credit

That’s right; a buyer with a credit score of 500 can still get a Federal Housing Authority (FHA) loan and buy a home. These loans do not always come with the most favorable conditions, but they still give buyers a chance to purchase a house.

Buyers with a credit score between 500-580 who apply for an FHA loan may have to put up a 10% down payment. That means if they are looking to buy a $100,000 home, they will have to put up $10,000 in order to secure a mortgage. If you need help securing this down payment, there are other loans available to give you a hand.

If your credit score is above 580 but you are still having trouble finding a loan, you can also go through the FHA. FHA offers loans that require a 3.5% down payment at closing if you have a credit score of 580. Buyers can use a down payment gifted by a family member or friend.

VA Loans

If you are a veteran of the United States Military, you have additional options for securing a loan. VA loans are available for veterans with credit scores over 500.

Before Applying for Loans…

There are a few things you should be sure and do before you apply for your loan.

Continue to improve your credit score.

Your credit score can drop just as fast as it can bounce back up. Check in with your credit score every month to ensure that you are on your way to good credit. Continue to look for opportunities to pay off debts and prove that you are a responsible borrower.

Budget appropriately.

Loans for people with bad credit often come with conditions. If you cannot afford to make the down payment requirements, pay closing costs, or shell out extra money for private mortgage insurance, you may put yourself at risk for defaulting on your loan. Look at your budget and what you will be able to afford before and once you secure a loan.

Take an education course.

Lenders often require borrowers to take an education course before they get a loan. The course contains information about budgeting, borrowing, and everything buyers need to know before they sign the paperwork on their new home.

Keep shopping.

Every lender will offer different terms and have certain requirements for securing a loan. Do not limit your search to FHA loans. Remember that you can still improve your credit score and open up the possibility of getting a loan with more favorable terms.

Buyers have more options than they might think. Talk to a financial advisor for more tips on how to improve your credit score and buy the house of your dreams.