How to Buy a House with Bad Credit

Buying a home when you have bad credit is a difficult endeavor.

However, there’s a reason to be optimistic, many Americans can buy a house with bad credit in today’s mortgage climate.

This article explains some things you need to do when looking to buy a home with less than perfect credit and the types of home loans that are available.

Rate Search: Check Today’s Mortgage Rates

Credit Requirements for a Mortgage

No Credit History

If you have no credit history then mortgage lenders ask for alternative credit lines, such as rent and phone payments to establish positive payment history. 


Bankruptcy will not disqualify you from a home loan. There is a 24 month waiting period after a chapter 7 bankruptcy, 12 months if you have extenuating circumstances. Borrowers must re-establish positive payment history post bankruptcy.

Late Payments

A single late payment will not automatic disqualify you, however, you should not have anymore than one late payment on any of your accounts in the past 12 months


There is a 36 month waiting period after you have filed for a bankruptcy. Some borrowers may qualify in 12 months with extenuating circumstances.

Collections, Judgements, and Federal Debt

Lenders may verify that judgments and Federal debt have been paid or on am agreed upon payment plan. Collections will not disqualify you, if your total collection debt is over $2,000 your lender may require you to make payment arrangements prior to closing.

Credit Score Requirements by Loan Type

Loan Type

Minimum Credit Score

FHA Loan

580 credit score with 3.5% down
500-579 credit score with 10% down



VA Loan


HomeReady / Home Possible Loan


FHA 203k Rehab Loan


Conventional Loan


Conventional 97 Loan


Piggyback Loan


FHA Loans

FHA loans have the lowest credit score requirements of any mortgage available today. Borrowers with a 500 credit score may be eligible with a 10% down payment. Borrowers with a 580 score or higher can be eligible with a 3.5% down payment.

VA Loans

VA loans are the only other type of home loan, besides FHA, that borrowers with a credit score below 620 can be approved for a mortgage. Veterans may qualify with a 580 credit score. They require no money down and there is no mortgage insurance requirements making them the cheapest mortgage option.

USDA Loans

The U.S. Department of Agriculture created the USDA loan program for low-income borrowers looking to buy a home in rural America. The credit requirement is higher at 620, but they come with no down payment and a reduced mortgage insurance premium.

Conventional Loans

Conventional loans are traditional home loans that require a 620 credit score to qualify. The down payment required is between 5%-20%. There are types of conventional loan programs, the Home Possible and HomeReady programs that were designed for first-time homebuyers that require just a 3% down payment.

Compensating Factors for Borrowers with Bad Credit

Having bad credit isn’t necessarily mean you’ll be denied a mortgage. You will need compensating factors to make up for your bad credit that will strengthen your loan application.

Compensating Factors

* Limited payment shock

* 5+ years with the same employer or in the same industry

* High income

* Large amount in savings

* Good credit

* 20% down payment

* Low debt-to-income ratio below 36%

* Residual Income

* Limited debt (credit cards, auto loan, etc.)

A Large Downpayment

Saving up for a larger down payment can increase your chances of buying a house if you have bad credit. A large downpayment reduces the loan-to-value ratio making the loan less of a risk to the mortgage lender. You need a 3.5% downpayment for an FHA loan. However, if you have 10% to put down, that will not only increase your odds at approval, it will reduce your PMI costs.

No Late Payments in the Last 12 Months

Just because you have a low credit score doesn’t mean that it is the only thing a lender will see if you had an unforeseen circumstance in your life, such as a loss of income or medical reasons that led to your poor credit. Having 12 months of timely payment history shows you have re-established your credit history, even if your score hasn’t completely rebounded yet.

A low Debt-to-Income Ratio

A debt-to-income ratio of 36% or lower will allow the lender to accept lower credit scores. Your debt-to-income ratio is the amount of debt obligations you have compared to your income. If you do not have a car payment or lots of credit card debt, this is a good sign you can handle a mortgage payment.

Improve Your Credit Score before Applying

Before you apply for a home loan with a mortgage lender, you will want to ensure your score is as high as possible. Here are a few things you can do to increase your score before applying.

Check Your Credit Report and Scores

The first thing you need to do before looking into buying a house is to check your credit and view your credit scores. You can get a free copy of your credit report once per year on the government website

You can get your free credit scores and monitor your credit will the Credit Karma and Credit Sesame apps.

You don’t need to sign up for a trial account using your credit card; these services vices are completely free.

How Your Credit Score is Calculated

How Your Credit Score is Calculated

Payment History


Your payment history is the single biggest factor in determining your credit rating. This includes late payments and collection accounts. Making your payments on time is the best way to a good credit score.

Credit Utilization


The amount of available credit you're using compared to your credit limit is called your credit utilization ratio. It accounts for 30% of your overall score. The lower your card balances, the higher your credit score will be. Try to keep your credit utilization ratio below 25%.

Length of Credit


How long your credit accounts have been opened accounts for 15% of your score. The longer your accounts stay open, the better your score will be. This is why it is wise to keep your credit accounts open.

Types of Credit


10% of your score is based on having multiple types of credit accounts open, such as credit cards, auto loans, mortgages, etc. It's best for your score to have a good mix of credit and loan accounts.

Credit Inquiries & New Accounts


Whenever you apply for a loan, there is a new inquiry into your credit history. These inquiries count against your score for up to 12 months. Opening a new account will also lower your credit score initially. 

Dispute any errors on your report

If you notice any errors on your credit report, you can dispute them with the three major credit bureaus.

You can dispute just about any item on your credit report, from old street addresses to account information. You want to make sure your entire report is accurate without any mistakes.

More: Tips on how to improve your credit score in a hurry

Pay down your credit card balance

Pay down the balances on your credit cards to less than 30% of the credit limit.

The ratio of the balance on your credit cards compared to the credit limit is called your credit utilization ratio. If you have a $1000 limit on a card with a $600 balance, your credit utilization ratio is 60%, which is considered very high. You want to pay down the balances on all of your cards as low as possible. The lower the balances are, the higher your credit score will be.

Use a pay for delete

A pay for delete agreement means the creditor agrees to remove the collection account from your credit report entirely when you pay it off.

If you have any collections on your credit report, contact the creditor and see if you can do a pay for delete. By correcting any errors on your credit report and paying down the balances on your credit card accounts, you will maximize your credit score quickly. This is important so you can have the highest credit score possible when a mortgage lender pulls your credit report. This will improve your chances of being approved to buy a house with bad credit.

Buying a House with Bad Credit

Even for borrowers with low credit scores, the American dream of homeownership still exists, although with a higher interest rate. Make sure you check your credit and fix any errors.

Maximize your credit score by paying down your credit card balances. If you have collections, negotiate with them to remove the account if you pay them off.

Check your savings to see if you have extra money for a larger down payment. Emphasize to the lender any compensating factors, like long employment history, high income, or clean payment history over the past year. Stay optimistic. Lots of people who have bad credit have been able to buy a house; you can too.

The Bottom Line

Many people ask the same question. How to buy a house with bad credit? While it’s not an easy task, it’s not impossible.

Once you have a copy of your credit report and scores, you need to work on increasing your credit rating as much as possible.

FHA loans are the best fit for consumers with a poor credit history. If you’re unable to get approved for an FHA mortgage, you can work on improving your credit using the strategies in this article or credit repair.

Check if you qualify for an FHA Loan and get current rates.