How to buy a house with bad credit

Melissa Aguilar

Melissa Aguilar

Man looking at bills on his desk
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If you feel like you’re ready to buy a house but have bad credit, you likely have options. Each lender can set their own terms and the minimum credit score they’ll approve. Some will work with people with a score as low as 500.

Before sitting down with a lender, you should have a full picture of your credit history and have an idea of how much home you can afford.

Save up a larger down payment

If you’re able to come up with a higher down payment, you can take out a smaller loan amount.

By having a higher down payment, you will also have a lower loan-to-value (LTV) ratio. That is the amount of money you owe divided by the house’s value.

For example, a $200,000 home with a 20 percent down payment ($40,000) would mean you’d need a $160,000 mortgage. Dividing the loan by the value of the home, or $160,000/$200,000 would result in an LTV of 80 percent.

Alternatively, if you put down a smaller payment of 10 percent for the same $200,000 home ($20,000) you will end up with a loan of $180,000. Your LTV would increase to 90 percent.

Ideally, your LTV should be lower than 80 percent. If that number is any higher, lenders see it as a risk that you’re more likely to default on the loan and will charge you higher interest. With that higher LTV you’ll also have to pay private mortgage insurance, adding to your overall expenses.

If you can wait a little longer to have a bigger down payment, you’ll be better off in the long run.

Take advantage of FHA loans

If you have low income you can look into the Federal Housing Administration’s loan program. They are backed by the US government and usually require lower down payments and lower credit scores. FHA loans are a great resource for first time home buyers.

VA loans might be an option

If you or your spouse have served in the US Military, you may be eligible for a loan through Veterans Affairs. VA loans don’t require any down payment, have low interest rates, and limited closing costs.

Consider alternate living arrangements

If you’re open to living in a rural area, you might qualify for a United States Department of Agriculture loan. Single family USDA loans help lower to moderate income households with no money down. The loans come from private lenders and the VA serves as a guarantor for part of the loan.

Their support makes the lender much more likely to give you better loan terms and look at your application outside of just your credit score.

You may also consider purchasing a mobile home and use the money you save on rent as part of a down payment for a conventional house.

Sometimes, if you want to buy a house with bad credit, it might be better to focus on improving your credit score before applying for loans. Taking a little more time will allow you to be in a better financial position and may even help you get a better home in the long run.