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Can You Get A Home Loan With Bad Credit?

13-Minute Read
Published on January 8, 2021
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*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

It’s not hard to get a couple of blemishes on your credit report. Whether it’s the mistakes of youth or an unexpected medical procedure that puts you behind on bills, it’s easy to see your credit dip if you’re not careful.

If you have less-than-optimal credit, it’s more difficult to prepare to get a mortgage. But just because your credit score is suboptimal doesn’t mean you have to give up on your dream of homeownership.

In this post, we’ll examine what it means to have a bad credit score, look at the other factors mortgage lenders consider and reveal the types of loans available for people with poor credit.

Finally, we’ll go over some things that can help boost your chances of being approved, whether you decide its best to wait or buy now.

What Is A ‘Bad’ Credit Score When Looking To Buy A Home?

To determine your creditworthiness, loan qualification and even interest rate, a mortgage lender will look at your median FICO® Score, among other factors.

Using information from the three major credit bureaus (Equifax®, Experian™ and TransUnion®), FICO® compiles findings to assign individuals a credit score, ranging from 300 – 850. These credit scores are calculated based on factors such as:

  • Payment history
  • Amount owed
  • Length of credit history
  • Types of credit
  • New credit

For the purposes of getting a mortgage, a low credit score is one below 620. If your credit is lower than 620, it may be difficult for you to get a mortgage. While possible, you should expect higher rates and less favorable loan terms.

Credit Scores Needed To Buy A House

Before going into how to get a home loan with less-than-perfect credit, it’s a good idea to get an idea of where your score stacks up and what it means for your chances of mortgage approval as well as the types of terms you would get on a loan.

Score Range

Credit Level

Mortgage Implications

800 – 850

Excellent

You’re at the very top end of the credit score range. You’re likely to get approved for the best possible terms on a loan you take out.

720 – 799

Very good

While not at the very top of the mountain, you’re likely to be approved and get really good interest rates and other loan terms.

620 – 719

Good

You’ve got a good score, though it can still be improved. You’ll likely pay slightly higher rates based on risk factors, although your chances of approval are still good.

580 – 620

Fair

You can be approved for an FHA loan by many lenders at this level, but you may be required to carry less debt and you may pay slightly higher rates.

<580

Poor

Loans to consumers with credit scores of less than 580 are considered subprime. That means many lenders won’t approve you. Those that do may require high down payments as well as a higher interest rate.

What Other Factors Do Mortgage Lenders Consider?

Besides your credit score, there are other qualification factors mortgage lenders consider when you apply for a mortgage. These could affect the number of options available to you or the interest rate you receive on the loan.

Before applying for a loan, it’s helpful for home buyers to understand what lenders look for. Although these guidelines apply for Quicken Loans®, it’s important to note that each lender might have different standards for qualification.

Down Payment Amount

Making a larger down payment will signal to your lender that you’re more creditworthy, giving you a better chance of getting approved for your mortgage and possibly lowering your interest rate.

If you’re financially secure today, you’ll have a better chance of getting approved and obtaining a lower interest rate, even if your past finances negatively influenced your score.

Debt-To-Income Ratio

Your debt-to-income ratio measures your ability to make payments toward money you’ve borrowed based on your total minimum monthly debt divided by your gross monthly income.

Your lender will consider car loans, student loans, credit card debt, home equity loans, mortgages and any other recurring debt to calculate this percentage.

Most lenders will consider a DTI less than 50% as acceptable when qualifying you for a mortgage, but the lower your DTI, the more loan options will be made available to you.

There are some options that can help you work around your DTI ratio, like FHA or VA loans. Other than that, working on paying off your debts is a good way to lower your DTI and get approved for a mortgage.

Income And Assets

Income and assets are crucial to determining your mortgage eligibility. Simply put, the more income you have, the more likely you are to have a lower DTI and a better chance of making your mortgage payment every month.

This makes the loan less risky for the lender. In order to document income, your lender will use things like pay stubs, W-2s and tax returns.

Assets are important for two reasons. The first is that you need savings or other resources to be able to come up with a down payment for your home in the majority of situations. Second, depending on the type of loan you’re getting, the lender may require you to have what are called reserves.

You can think of reserves as the number of months of mortgage payments you could afford if you were to suffer a loss of income for any reason. Every situation is different, but in general 2 months’ worth of reserves is a good guideline for qualification.

Although assets are commonly thought of as checking and savings accounts, you can also use any cash that can be sourced and easily liquidated. These could include anything from stock and bond holdings to an old car you’re looking to offload.

In particular, a higher down payment usually means a lower interest rate, so having these assets can be very important.

Length Of Work History

As important as having income is having a history of receiving that income.

Your mortgage lender is going to want to see that you’ll continue to get paid. This is one of the risk factors they’ll examine closely when you apply for a mortgage.

Mortgage lenders will sometimes approve you with as little as a year of work history, but ideally, they like to see 2 years.

You’ll also want to try to avoid changing jobs in the middle of the mortgage process. If your income structure totally changes or you’re moving into a different field, a lender won’t necessarily be able to count on that income continuing in the future. If it’s a higher-paying job in the same field, this is looked at more favorably than a career change.

Co-Signers

Having a co-signer is another thing that can help if you’re on the mortgage qualification bubble. When someone co-signs a loan with you, their income and assets can be used to help you qualify.

The extra income is important because it can lower your DTI ratio. This lowers your risk factors in the eyes of lenders. In certain limited situations, your DTI also impacts the actual interest rate you get due to pricing adjustments on certain financing types.

Additionally, the assets of the co-signer could be used to show funds for a down payment or reserves. This could help you get a lower rate if the down payment is big enough.

Additional reserves may also help you qualify for different loan programs, and they ultimately show the lender that you’re better positioned to handle a bump in the road.

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So, Can You Buy A House With Bad Credit?

While it may not be easy to get a home loan with bad credit (FICO® Score under 620), it’s possible. However, it’s important to closely examine the terms, interest rate and potential risks before moving forward.

FHA loans and VA loans are two mortgage programs that may be worth looking into. Additionally, there are several local and national assistance options that may be available to you.

FHA Loans

If you have a lower credit score, an FHA loan may be right for you. The Federal Housing Administration offers a government-insured loan with easier credit qualifying guidelines.

This particular type of loan offers lower down payments, low-equity refinances and, oftentimes, lower interest rates. If you have a median credit score of at least 580, your down payment can be as low as 3.5%.

If you already have an FHA loan and you’re looking to refinance, consider an FHA Streamline. There is generally no appraisal required, and usually you only need to provide limited documentation.

FHA loans do have certain requirements for those who have filed for bankruptcy. There’s typically a waiting period to apply for a loan after a discharge or dismissal; however, the length of time depends on the type of bankruptcy. Ask your lender for more details.

An FHA loan also allows you to have a higher DTI ratio compared to conventional loans, as long as you have a median credit score of of 620 or better. This is beneficial for first-time home buyers with low income who have debt.

One thing to keep in mind with an FHA loan is that if you put less than 10% down, you’ll have to pay a mortgage insurance premium for the life of the loan. You could make a down payment of 10% to avoid it, but you’ll still pay it for at least 11 years (unless you refinance once you’ve reached 20% equity in your home).

VA Loans

If you’re a veteran or currently serving in the military, you could also qualify for a VA loan. Because the Department of Veterans Affairs backs these loans, they have less stringent credit guidelines.

There is no standard required credit score for a VA loan, although some lenders will have a number in mind. For example, Quicken Loans requires a credit score of 580 to qualify for a VA loan. Like an FHA loan, a VA loan is also forgiving of past financial difficulties, like bankruptcy.

There is no down payment required for a VA loan. Additionally, there is no mortgage insurance necessary for a VA loan; instead, you pay a one-time funding fee that can be paid at closing or that is built into the loan.

A VA loan is more lenient with DTI ratios, allowing a ratio as high as 60% if your median credit score is 620 or higher in order to qualify for a fixed-rate loan.

If your median credit score is at least 580 or below 620, there are other DTI requirements. Your housing expense ratio, or the portion of your gross income that goes toward your mortgage payment can't be any higher than 38% of your gross monthly income. In addition, your total DTI has to remain at 45% or lower.

Keep in mind that in order to qualify for a VA loan, you have to be:

  • Currently serving in the United States military
  • An honorably discharged veteran
  • A not-remarried (except in limited circumstances) surviving spouse of a veteran or service member who died in service or from a service-connected disability.
  • Able to obtain a VA Certificate of Eligibility, and either you or your spouse (if you’re actively deployed) must live in the home.

If you’re interested in a VA loan, check out this complete guide.

Local And Federal Assistance Programs For First-Time Home Buyers

There are various assistance programs and resources that make the home buying process easier for first-timers.

While Quicken Loans doesn’t offer any in-house programs, we do accept the following:

  • HomePath Ready Buyer Program: Fannie Mae offers this product to first-time home buyers (people who have not owned a home in the past 3 years) to purchase foreclosed properties as-is for as little as 3% down and 3% back in closing cost assistance.
  • Home Possible®and HomeReady®:These programs from Freddie Mac and Fannie Mae offer home buyers who make less than 80% of the area median income where they're looking to buy a chance to purchase a home for as little as 3% down without a first-time home buyer restriction.
  • Government and nonprofit grants: The Department of Housing and Urban Development offers a list of state and local home buying programs. You can also look for charitable organizations that will help with the financing of a home.
  • Employer assistance: Some employers offer loan assistance that is forgivable if you stay with the company for a certain number of years. You might also be able to get assistance from your labor union.
  • Borrowing from retirement funds: After checking with your financial advisor/tax professional for advice, you could take a loan from your retirement funds to be paid back over time on a set schedule and use it for down payments or other mortgage transaction costs.
  • Mortgage credit certificate: This is a state or local government option that is available for low- to moderate-income buyers to take a credit for a reduction of their tax bill based on their mortgage interest.

Before you consider locking into one of these options, make sure you speak with a Home Loan Expert for more specific qualifications.

Understanding Loan Options For Less-Than-Perfect Credit

To help you understand the options available if your credit is a little messy, we’ve put together this handy chart.

Loan Type

Median Credit Score

Bankruptcy

Foreclosure

Judgments And Tax Liens

Conventional

620

Chapter 7: Discharged or dismissed more than 4 years ago

 

Chapter 13: Discharged more than 2 years ago and filed more than 4 years ago OR dismissed more than 4 years ago

 

Chapter 11: discharged or dismissed more than 4 years ago

7 years from the date shown on the credit report

These must be paid in full.

FHA

As low as 500, but Quicken Loans and many other lenders require 580

Chapter 7: Discharged or dismissed more than 2 years

 

Chapter 13: Discharged or dismissed prior to application

 

Chapter 11: Discharged or dismissed 2 years prior to application

3 years from date of credit report

You can pay them in full or be on a repayment plan under certain circumstances.

USDA

No specific minimum, but Quicken Loans requires 640

Chapter 7: Discharged or dismissed 3 years prior to application

 

Chapter 13: Discharged or dismissed greater than 1 year prior to application

 

Chapter 11: Discharged or dismissed 2 years prior to application

3 years from credit report date

You can pay them in full or be on a repayment plan under certain circumstances.

VA

No standard minimum, but Quicken Loans requires 620

Chapter 7: Discharged or dismissed 2 years prior to application

 

Chapter 13: Discharged or dismissed prior to application

 

Chapter 11: Discharged or dismissed 2 years prior to application

2 years from credit report date

These must be paid in full if they’re showing up on the title. If just on credit, you can have a repayment plan provided you meet qualifications.

 

It’s worth noting that this table is representative of the guidelines of Quicken Loans. Other lenders may have different policies.

Should You Buy A House With Bad Credit?

Whether you buy a home when your credit isn’t stellar or rent one while you build your credit up is ultimately an individual decision, but there are some pros and cons you can weigh when determining whether buying now is right for you.

Pros

To begin with, there are a couple of market factors at play that are unique to the current market.

Mortgage rates are really quite low right now and all indicators predict low rates for the near future.

Monthly rent tends to go up faster than the mortgage payments do, depending on your location. Plus, the equity is yours – you don’t have to give money to a landlord.

Beyond this, buying a home may provide you the space you need that available rentals in your area just can’t afford.

Cons

There are also downsides to buying a home with less-than-stellar credit. Let’s run through them briefly:

  • You may have to come up with a higher down payment depending on the loan option.
  • If you choose an FHA loan, you’ll pay mortgage insurance premiums, usually for the life of the loan. In that case, you’ll have to keep your credit scores up, because you’ll want to refinance when you reach the 20% equity threshold so you won’t have to pay MIPs or PMI.
  • If you can only get offers of subprime loans, watch out for predatory lenders and onerous terms that aren’t necessarily in the favor of the borrower.

If you decide buying a home is the way to go, use the following tips as a guide.

How To Buy A House With Bad Credit

If you decide to buy a house with bad credit, here are some steps you can take to increase your chance of success.

Speak With Your Home Loan Expert Or Lender

Explain the whole story of your credit issues to your Home Loan Expert or lender. Perhaps you have a high income and your credit was damaged because of past mistakes, or perhaps you were a victim of identity theft.

Lenders can take these factors into consideration and work with you to provide alternative solutions. Make sure you have income and financial documentation with you when you explain your credit issues, as these things may help you build a stronger case.

Apply Individually

If your spouse’s credit score prevents you from qualifying for a mortgage or drives your interest rate higher, you may want to apply for the mortgage solo. Keep in mind that if you apply without your spouse, you may qualify for a smaller loan amount because only your individual income and assets will be factored in.

If your spouse has a relatively high income and low debt, though, it may be smart for you to apply together. A good lender should help you work through these scenarios to determine what is best for you.

Liquidate Assets

If you don’t have the cash for a large down payment on hand, look for assets that you can liquidate without taking large losses. For example, your retirement account could be a source of cash for your down payment (but check with your financial advisor/tax professional first).

Ask Family For Help

Depending on the type of loan you’re applying for, a parent or another non-occupant can co-sign on your mortgage so you can get approved (you may even get a better interest rate). Be sure to ask your lender for details on what’s required for co-signers.

You can also consider funding your down payment with gift money from relatives. However, the amount of gift money you use can actually affect the mortgage type for which you qualify. Learn more about how using gift money impacts your loan approval with our guide to using gift money for your down payment.

What To Do Instead Of Buying Now

While buying a home can be appealing, if you can afford to wait, it could be more financially beneficial in the long run. If you have better credit, you’re more likely to get a lower rate, which can save you thousands of dollars in interest over the life of your loan. You’ll also have more mortgage options, so you’ll be able to pick the most beneficial program for you.

In the following sections, we’ll go over some steps you can take to improve your credit and prepare to buy a home in the future.

Check And Improve Your Credit

You’ll first need to get your credit report to fully understand your score. Sites like Rocket HomesSM provide your complete credit report and score, and offer tools to help you expand your credit knowledge. Once you and your spouse have obtained your credit reports and scores, you can take steps to positively impact them.

A simple way to improve your score is to start making your payments on time. Payment history is one of the largest factors used in calculating your credit score. A late payment can stay on your credit report for up to 7 years.

Rocket HomesSM offers a score simulator that allows you to see how your credit score could change based on your DTI. Keeping your DTI relatively low is important, so try paying off most or all of your debt before applying for a mortgage, and avoid making large purchases on credit.

Dispute Credit Errors

Check your credit report for errors, fraud or unauthorized accounts. According to a 2012 study by the Federal Trade Commission, 25% of consumers had errors on their credit reports that could affect their credit score, and 5% had errors that could result in less favorable terms for loans. Learn how to dispute errors on your credit report, and be sure to monitor your report regularly.

Snowball/Avalanche Debt Payments

Debt snowballing is based around the idea that you pay off your smallest debt first. This gives you the psychological win you need in order to stay motivated while you pay off increasingly larger debts.

If, on the other hand, you know you’re the type of person who’s going to stick to something without seeing the rewards right away necessarily, the best thing to do is to follow the avalanche method, by which you pay off your highest-interest debt first. This saves you the most money.

If you plan on applying for a mortgage sooner rather than later, the best thing to do is to pay off the loans with the biggest monthly payment. This is the direct effect of lowering your DTI and improving your chances to qualify.

Become An Authorized User

You can also piggyback off someone else’s good credit rating by becoming an authorized user on their card. When they make their payment on time every month, your credit score goes up. This is a great way for parents to help their kids get started with good credit.

Save A Larger Down Payment

Lenders will typically offer better interest rates to those with larger down payments and higher credit scores. When your loan-to-value ratio is lowered with a larger down payment, the lender’s risk decreases, and you can often reap the benefits with lower interest payments. And if you put 20% down, you can avoid paying private mortgage insurance, which can mean big savings in the long run.

You can also take our course to learn how to save up for a down payment in 180 days.

If you feel like you’ve been able to use these tips to improve your credit and you’re now ready to move forward and buy a home, apply online with Rocket Mortgage® or give us a call at (800) 785-4788.

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