Owning a home is an exciting dream for many Americans. If you want to buy a home, you may have questions about the qualification process for mortgage loans. But is it possible to buy a house with bad credit? Keep reading to learn more about mortgage lenders and how to finance a house with a bad credit score.
What Is the Minimum Credit Score Requirement for a Mortgage Loan?
A bad credit score can make it difficult for someone to qualify for home financing. You may be ready to purchase a home, but fear of ineligibility may hold you back. Many consumers want to know the minimum credit score requirements for a mortgage loan, but there isn’t one!
Mortgage lenders work with almost every credit score range. There are five categories for credit scores, as shown below:
- Excellent — 800-850
- Very Good — 740-799
- Good — 670-739
- Fair — 580-669
- Poor — 300-579
Most lenders prefer working with individuals with a “good” credit score. However, getting a home loan with bad credit is entirely possible! But before you start house hunting, keep in mind that it may be challenging to secure a high loan amount and low-interest rates with bad credit. Keep your expectations realistic, but do not settle for less than what you want.
Buying a home is a critical life decision consumers should make with care. As long as you take the time to compare lenders and loan offers, you can afford to buy your perfect house with bad credit!
What Factors Do Mortgage Lenders Consider for Loan Amount?
Although it’s possible to buy a house with bad credit, you may not get a substantial loan amount. Several factors determine your mortgage loan amounts, such as your credit score, yearly household income, and down payment.
When a person applies for conventional loans, the lender will examine their credit report. A credit report showcases a person’s financial history in great detail. Lenders may not trust you to pay off a high mortgage loan on time if you have an unreliable payment history. But if you recently started ensuring every monthly payment is on time, lenders may consider you more creditworthy.
Lower credit scores will limit your financing options since lenders tend to avoid financial risks. If your credit score range is fair or poor, it may be worthwhile to consider an FHA loan instead of a conventional loan.
Yearly Household Income
If you have a steady income, you do not need to meet the minimum credit score requirements for conventional loans! Your ability to make on-time payments can help you get a decent loan to buy a house.
Ensure you include all income available to you to give your lender a clear picture of your financial situation. For example, you may work a traditional full-time job, but perhaps you also earn supplemental income from side jobs.
If you intend to buy a house, you will need to provide an upfront down payment based on a small percentage of the purchase price. The minimum requirement for a down payment on a house varies per lender.
You may have heard that mortgage lenders expect at least 20% of the home cost as a down payment. But you can get a mortgage loan with a 3% down payment! However, you have a better chance of getting loan approval with a decent down payment. And if you use a low down payment amount, your mortgage loan will have higher monthly mortgage payments.
What Are FHA Loans?
The Federal Housing Administration (FHA) offers mortgage insurance on loans so consumers can afford the cost of buying a house! The FHA is a part of the U.S. Department of Housing and Urban Development. Since 1932, FHA loans have helped thousands of people get better loan deals.
An FHA loan can help you get low closing costs, flexible qualification requirements, and smaller down payments with a low credit score. If your credit score exceeds 580, your down payment can be as low as 3.5% of the purchase price! And you can buy a house with a 10% down payment if your credit score is between 500 and 579.
FHA loans also protect lenders since the FHA pays a claim when a borrower defaults on a loan. This financial protection encourages lenders to extend more loan offers to prospective homebuyers. FHA loans can help homebuyers with bad credit scores secure family homes throughout the United States.
Do I Qualify for an FHA Loan?
In order to get an FHA loan to buy a house with bad credit, you must meet the qualification requirements. The qualification requirements for FHA loans are generally easy to meet, as shown below:
- Have a steady income.
- Have proof of employment.
- Have a debt-to-income ratio lower than 43%.
- The home you buy must become your primary residence.
What Are VA Loans?
The Department of Veterans Affairs offers a VA loan program, which provides no-down payment mortgage loans for veterans and active-duty military members. Private lenders are willing to provide VA loans to individuals with bad credit scores because the VA loan program guarantees a portion of the loan.
VA loans can help home buyers avoid providing thousands of dollars upfront as a down payment. Veterans and active military members can also receive low-interest rates and limited closing costs. Most conventional loans require private mortgage insurance (PMI) if the down payment is less than 20% of the home’s purchase price. But you do not need to get PMI if you qualify for a VA loan!
Do I Qualify for a VA Loan?
Eligibility for a VA home loan depends on your length of service or service commitment. If you are an active service member, you must have served at least 90 continuous days. If you are a veteran or reserve member, eligibility depends on when you served in the military. For example, suppose you served anytime from the Gulf War period (August 2, 1999) to the present. In that case, you are eligible if you served for:
- At least 24 continuous months or
- The entire period (at least 90 days), you were ordered for active duty or
- At least 90 days if you were discharged for hardship or force reduction or
- Less than 90 days if you were discharged for a service-connected disability
Check the Department of Veterans Affairs website for additional details on specific service requirements.
How Much House Can I Afford With Bad Credit?
It’s essential to consider your purchase budget before buying a house with bad credit. Spending more on a house than you can afford is one of the most common financial pitfalls to avoid. To calculate how much house you can afford, you must know your gross annual household income and monthly debts. Once you know how much money you have available, you can follow the 28/36 rule when house hunting.
The 28/36 Rule
According to financial experts, the best house-hunting budget is the 28/36 debt to income rule. This rule stipulates that your household budget should not exceed 28% of your monthly income, and your monthly debts should not exceed 36% of your income. If you make $6,000 monthly, you should spend less than $1,680 on house-related expenses and $2,160 on debts.
The 28/36 budget rule ensures you have enough money to pay off payday loans for bad credit and other debts without minimizing your available funds. Following a budget plan can help you better balance necessary and unnecessary spending.
The Bottom Line
You can buy a house despite having a bad credit score! By doing thorough research on lenders and comparing loan offers, you can get an affordable mortgage loan to purchase your dream home! You can also work on boosting your bad credit score at any time. Start by paying your bills on time and reducing your total debt. Over time with continuous effort, you will start to see your FICO score grow!
The FHA History
FHA Loan Requirements
VA Home Loans
How much house can I afford?