How to Buy a House with Bad Credit: Your Options and Action Plan

What "Bad Credit" Means in the Context of Home Buying

Credit scores range from 300 to 850. Mortgage lenders generally categorize scores as follows: 740+ is excellent; 700–739 is good; 660–699 is fair; 620–659 is below average; below 620 is poor or "bad credit" in most lender eyes. The lower your score, the fewer loan programs you qualify for and the higher the interest rate you'll pay.

That said, "bad credit" is not an absolute barrier to homeownership. Government-backed loan programs exist specifically to serve borrowers with lower credit scores, and with a focused plan, many people can improve their score enough to qualify for better terms within 6–24 months.

Loan Programs That Accept Lower Credit Scores

FHA Loans

The Federal Housing Administration (FHA) backs loans for borrowers with credit scores as low as 500. The terms:

• 580+ credit score: Qualifies for 3.5% down payment
• 500–579 credit score: Requires 10% down payment
• Below 500: Not eligible for FHA financing

FHA loans require mortgage insurance premiums (MIP) — an upfront MIP of 1.75% of the loan amount at closing, plus an annual premium of 0.55–1.05% of the loan balance added to monthly payments. MIP remains for the life of the loan in most cases (unless you put down 10%, after which it drops off at 11 years).

VA Loans

For active-duty service members, veterans, and surviving spouses who meet service requirements, VA loans offer exceptional terms:

• No minimum credit score set by the VA (lenders typically require 580–620)
• No down payment required
• No private mortgage insurance
• Competitive interest rates

If you're eligible for a VA loan, it's almost always the best option regardless of your credit situation.

USDA Loans

USDA loans are available for eligible rural and some suburban properties for borrowers who meet income limits. USDA doesn't set a minimum credit score, but most lenders require at least 580–640. Like VA loans, USDA loans require no down payment, making them valuable for lower-credit borrowers in eligible areas.

Conventional Loans with Lower Credit

Fannie Mae and Freddie Mac conventional loans have a minimum credit score of 620. Below that, you need a government-backed program. Between 620 and 680, you'll qualify for conventional financing but at higher interest rates and with PMI requirements. Non-QM (non-qualified mortgage) lenders sometimes offer products for borrowers below 620, but at significantly higher rates and down payment requirements.

The Real Cost of Bad Credit: Interest Rate Impact

This is the part that motivates most borrowers to work on their credit before buying. On a $300,000 30-year mortgage:

• Credit score 760+: Rate approximately 6.5% → Monthly payment $1,896 → Total interest $382,560
• Credit score 680–699: Rate approximately 7.2% → Monthly payment $2,038 → Total interest $433,680 (extra $51,120 over loan life)
• Credit score 620–639: Rate approximately 8.0% → Monthly payment $2,201 → Total interest $492,360 (extra $109,800 vs. best rate)

Each 20-point improvement in credit score typically moves you into a better rate tier. Spending 6–12 months improving your credit before applying can literally save tens of thousands of dollars.

How to Improve Your Credit Score Before Applying

1. Pay All Bills On Time

Payment history is 35% of your FICO score — the single biggest factor. Set up autopay for every account to ensure nothing is missed. Even one 30-day late payment can drop your score 50–100 points and takes 7 years to fall off your report.

2. Reduce Credit Card Balances

Credit utilization (how much of your credit limit you're using) accounts for 30% of your score. Paying down balances to below 30% of your limit — ideally below 10% — can raise your score significantly within 1–2 billing cycles. Paying off a maxed card from $5,000 to $500 on a $5,000 limit can add 30–50 points.

3. Don't Close Old Accounts

Closing old credit card accounts reduces your total available credit and increases your utilization ratio, which can hurt your score. Keep old accounts open even if you don't use them regularly.

4. Dispute Errors on Your Credit Report

Get free copies of all three credit reports at AnnualCreditReport.com. Review each carefully for errors: accounts that aren't yours, incorrect payment statuses, balances that are wrong. Dispute errors in writing with the credit bureau — they must investigate and correct valid disputes within 30–45 days. Correcting a major error can produce a significant score jump quickly.

5. Become an Authorized User

Ask a family member with excellent credit to add you as an authorized user on an old, low-utilization card. The account's positive history often appears on your credit report, boosting your score without requiring you to use the card.

6. Consider a Secured Credit Card or Credit Builder Loan

If your credit history is thin, a secured credit card (where you deposit cash as collateral) and credit builder loans from credit unions or community development financial institutions (CDFIs) report positive payment history to credit bureaus, building your file from the ground up.

Finding the Right Lender

Not all lenders accept the same credit scores. FHA-approved lenders are required to accept FHA applications from borrowers with qualifying scores, but individual lenders set their own "overlays" — stricter standards above the FHA minimum. Shop at least 3–5 lenders, including online lenders, credit unions, and community banks, as they vary significantly in their willingness to work with lower-credit borrowers.

Working with a HUD-approved housing counselor (free or low-cost) can help you find lenders who specialize in helping lower-credit borrowers and navigate any available down payment assistance programs.

What to Expect During the Process

With bad credit, expect: more documentation requests, longer underwriting times, requests for explanation letters for derogatory items on your credit report, and potentially higher interest rate offers. Be patient and transparent with your lender — providing clear explanations for past credit issues (medical emergency, job loss, divorce) with evidence that the situation has resolved often helps the underwriting process.