How to Buy a Home Even if You Have Bad Credit



Experts Answer Your Top Questions About Buying a Home With Bad Credit

Your credit score is one of the crucial determining factors in whether you can qualify for a mortgage. “The higher your score, the less risky you appear on paper,” says Staci Titsworth, a regional manager at PNC Mortgage in Pittsburgh, PA. If that sends shivers up your spine, keep reading. We’re here to help.

The reality is that the average U.S. household has over $15,000 in credit card debt. You’re not alone if you’re wondering: Can I get a loan with bad credit? The answer is yes, but for a smooth home-buying journey, you’ll want to take care of any financial blips on your report now. Here we share expert answers to your questions, including exactly what a credit report is and how to raise your score to get ready to buy a house.

  • What exactly is a credit score?

It’s common practice for mortgage lenders to check your credit score, which is calculated based on the information that appears on your credit report. Five aspects impact your score, each varying in importance: payment history (35%), debt-to-credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%). A quick primer:

Payment history. You need to make payments on time, since one late payment can significantly ding your score. One example: A 30-day delinquency can cause as much as a 90- to 110-point drop on a score of 780 for a consumer who has never missed a payment before, according to Equifax.

Debt-to-credit utilization ratio. This is how much debt you’ve accumulated on your credit cards divided by the credit limit on the sum of your accounts. Credit experts recommend keeping this ratio around 30%. If you’re maxing out your credit cards each month, you could be damaging your credit score in the process.

Length of credit history. Having a longer credit history raises your score. Since credit agencies look at the age of your oldest account, the age of your newest account, and the average age of all your accounts, you should keep all of your accounts open—even those with zero balances, says credit expert Bill Hardekopf.

Credit mix. It helps your score to have a combination of different types of credit accounts, including credit cards, retail accounts, installment loans, car loans, and mortgage loans. (You’re on your way to getting the last one.)

New credit. Each time you apply for a new credit account, you trigger a “hard inquiry” on your credit, which dings your score (typically by five points). Therefore, avoid opening multiple credit accounts at the same time, says Hardekopf. Doing so will lower the average age of your credit accounts and hurt the length of your credit history.

Caveat: Your credit report doesn’t contain your actual credit score. However, your credit card company can most likely provide your score to you for free, or you can contact a nonprofit credit counselor to find out your score.

  • What is an ideal credit score?

A perfect credit score is 850, but only about 0.5% of consumers reach that number, according to Fair Isaac Corporation, creator of the widely used FICO credit scores. Once you’re over 740, you’re considered to be in the best range for mortgages and should be able to qualify for the best interest rates, says Chris Hauber, a mortgage loan originator with Hallmark Home Mortgage in Denver, CO.

If your score is in the 700s, you should still be able to qualify for an attractive interest rate. For conventional loans, most lenders look for a credit score of at least 620, says Hauber. At a minimum, applicants should have at least a 660 credit score to land a decent interest rate and avoid jumping through additional hoops to qualify for a loan.