How to Buy a Home With Imperfect Credit

Your credit score is one of the most important factors that an underwriter will consider when reviewing your mortgage application. That’s why lenders often reserve their best rates for those with great credit while those with bad credit may struggle to get approved for a mortgage at all.

But what if you fall somewhere in between those two extremes? Many people have credit scores that are more middle-of-the-road. In some cases, this is simply due to a short credit history. For others, old negative items on their credit reports may be keeping their score from reaching the stratosphere.

The good news is that you have several options if you have imperfect credit and want to buy a home. Below, we show the span of scores that might be considered imperfect and break down the best ways to get a mortgage when your score falls within this range.

Overview of How to Buy a Home With Imperfect Credit

1. Look for Flexible (But Not Predatory) Mortgages 2. Save as Much Cash as You Can 3. Shop Around With Multiple Lenders 4. Stick to Your Home Buying Budget

What Is Considered Imperfect Credit?

Each lender is free to set its own criteria for which credit scores will qualify homebuyers for the best rates and options, and which scores won’t. However, FICO provides the following credit score ranges as a general guide:

According to myFICOs benchmarks, any credit score between 580-739 could be considered imperfect credit. A score below 580, meanwhile, would more likely be referred to as bad credit.

Related: How to Buy A Home With Bad Credit

How to Buy a Home With Imperfect Credit

Qualifying for an attractive mortgage with a bad credit score (below 580) can be difficult. However, it is possible, as well see. And there are several attractive ways to buy a home with imperfect credit (580-739). Here are four key steps you’ll want to take.

1. Look for Flexible (But Not Predatory) Mortgages

Government-insured loans (FHA, VA, and USDA) are generally more flexible with their borrower requirements than conventional loans. Each of these loan programs will accept borrowers with imperfect credit scores. So narrowing your lender search to companies that offer these types of loans can be a smart strategy.

It’s important to understand, however, that you’ll typically need a credit score of at least 620 to qualify for a conventional mortgage. This means that if you have a score below 620 and a lender is offering you a mortgage that’s not part of the FHA, VA, or USDA programs, you’re most likely being offered a non-qualified mortgage.

Beware that the non-qualified mortgage industry can be a breeding ground for predatory lending. These loans often have higher interest rates and upfront fees. Some may also include hidden fees like prepayment penalties. If you’re considering a non-qualified mortgage, be sure to read all the fine print before signing on the dotted line.

Related: 16 Types of Mortgages Explained

2. Save as Much Cash as You Can

The larger the down payment you make on a home, the lower the lender’s risk of losing money on the mortgage. Lenders also know that when buyers make large down payments, they have more skin in the game and are less likely to default. For these reasons, you may be able to overcome a spotty credit score by simply bringing more cash to the closing table.

It should also be noted that you may be able to raise your down payment amount faster than you can raise your credit score. It can be difficult to significantly change a credit score in a short period of time. This is especially true if you have negative items on your credit reports that won’t fall off for several years.

However, you may be able to save up a sizable down payment in just a few months by reducing your budget, increasing your income, or both. For this reason, focusing on savings may be the best short-term strategy when you’re looking to buy a home with imperfect credit.

3. Shop Around With Multiple Lenders

Many people will check with multiple retailers before buying a $30 shirt. Yet many of those same people may only call one lender for a mortgage rate quote on a $300,000 home purchase.

This is always a bad approach but especially when you don’t have a high credit score. The interest rate that lenders are willing to offer to someone in your credit range could vary widely. That’s why it’s so important that you shop around before making a decision.

Many of the best mortgage lenders make it easy to get an anonymous mortgage quote on their website. Or you can check your rates with multiple lenders in minutes using an online marketplace.

When getting rate quotes, know that some mortgage lenders will only perform a soft credit inquiry while others will perform a hard credit check. Soft inquiries won’t impact your credit at all. And multiple hard credit inquiries within a 14-day period are treated as one for your credit scores.

4. Stick to Your Home Buying Budget

Borrowers with an imperfect credit score are unlikely to qualify for a mortgage company’s lowest rates. This means to keep your mortgage payment below a certain level, you’ll need to buy a slightly less expensive house than you would if you had an exceptional score.

Before you start shopping for a home, carefully calculate how much of a mortgage payment you can afford within your budget. Once you know that number, stick with it no matter what.

Exceeding your mortgage budget so that you can buy your dream home may seem like no big deal today. But down the road, it could lead to a lot of financial stress and anxiety.

Best Mortgage Options When You Don’t Have Perfect Credit

Earlier, we explained that FHA, VA, and USDA loans are all known for offering flexible credit requirements. But, depending on your specific score, a conventional mortgage may still be an option as well. Here are the requirements, benefits, and drawbacks of each loan type.

FHA Mortgages

The FHA mortgage program has fantastic options for borrowers with lower credit scores. With a 3.5% down payment, the minimum credit score that can be accepted is 580. But if you’re able to put 10% down, you may be able to qualify with a score as low as 500.

It’s important to point out that each private lender is still free to set its own credit score minimums for FHA borrowers. For example, Rocket Mortgage says that its minimum credit score for FHA loans (regardless of down payment amount) is 580.

One of the few downsides to taking out an FHA mortgage is that you won’t ever be able to eliminate mortgage insurance premiums (MIP) if your down payment was less than 10%. However, if your credit score improves and you build up at least 20% equity in your home, you could later refinance to a conventional loan to get rid of mortgage insurance.

VA Mortgages

There is no minimum credit score requirement for a VA mortgage (although the lender will likely set its own minimum). And, for those that qualify, a VA mortgage can offer even more benefits and flexibility than an FHA loan.

First, VA loans don’t require any down payment whatsoever. Second, VA mortgage borrowers don’t have to pay private mortgage insurance.

The main drawback to the VA loan program is simply that many borrowers won’t qualify for it. Eligibility is restricted to active military members, veterans, or certain surviving spouses. Also, borrowers do pay a one-time VA funding fee.

USDA Mortgages

The USDA does not set a credit score minimum for the loans that it guarantees. However, most lenders are going to prefer a credit score of at least 640. There are three main USDA loan programs. These are:

• Guaranteed Loan Program: Provides up to 100% financing to low- and moderate-income households.
• Direct Loan Program: Offers financing to low and very-low-income applicants and can provide a payment assistance subsidy.
• Housing Repair Loan Program: Provides financing to very-low-income homeowners. The maximum loan amount is $20,000.

Similar to VA loans, the main downside to USDA loans is that it can be difficult to meet the qualification criteria. The home must be located in an eligible rural area and there are income-eligibility requirements as well.

Conventional Mortgages

Just because you have imperfect credit doesn’t necessarily mean that you won’t be able to obtain a conventional mortgage. In fact, you may be able to qualify for conventional financing with a score as low as 620.

Fannie Mae and Freddie Mac also each offer conventional loan programs that are meant to assist low-income borrowers. The Fannie Mae program is called HomeReady and Freddie Mac has named its program Home Possible. Both of these programs have down payment requirements that are as low as 3%.

Mortgage insurance (MI) requirements for HomeReady and Home Possible loans are reduced once the homeowner reaches an LTV (loan to value) of 90%. And MI can be canceled altogether once your balance has dropped below 80% of your home’s appraised value. If you have a low salary, be sure to ask your real estate agent and/or mortgage broker about these programs.

Best Homes to Buy When You Have Less-Than-Stellar Credit

Looking for a great deal on a home that you can buy without having perfect credit? Here are two programs that make it easy for young people with little or no credit history (or poor credit) to purchase a home.

USDA-Eligible Rural Homes

Flexible credit requirements are just one of the many potential benefits of buying a home that qualifies for USDA mortgage financing. Through the USDA Direct Home Loan program, you may also qualify for additional benefits.

Through this subsidy program, borrowers can reduce their interest rate to as low as 1%. This is a big deal if you’re someone who wouldn’t normally qualify for the best rates that are currently available. This program also offers extended loan terms of 33-38 years.

To demonstrate how much you could save with this program, imagine that you borrowed $200,000 at 4% interest with a 30-year term. In this case, your monthly mortgage payment would be $1,152. But with a 1% interest rate, your payments would drop by over $300 to $841. That’s a huge difference in mortgage affordability.

It should be noted that there’s a companion business subsidy program that some savvy millennials are using to create businesses in rural areas.

How to qualify for a USDA payment subsidy

You can download and print an application for the USDA Direct Home Loan program here. Once you’ve filled out your application, you’ll need to turn it in at your local RD office.

To be eligible for a payment subsidy, your income must be below the USDA’s low-income limit for your area. You can also request assistance if your income was above the limit when you initially took out your loan but has since fallen below it.

Generally, the USDA will make annual reviews to see if you still qualify for a mortgage subsidy. But provided that your pay stays below the low-income limit, you can continue to receive assistance for the life of the loan.

Do USDA subsidies have to be repaid?

Yes, subsidy recaptures must be repaid when you sell your home or are no longer living on the property. Recapture formulas change over time, but currently, the maximum you can be required to pay is either 50% of your home’s valuation or all of the subsidy that you received (whichever is lower).

In some cases, homeowners may qualify for a 25% recapture discount if they pay it off at the same time that they pay off their mortgage. To receive an estimate of your subsidy recapture payoff amount, you can use the USDA’s Customer Service Center Interactive Voice Response system at (800) 414-1226.

HUD Homes

The Department of Housing and Urban Development (HUD) insures FHA mortgages. So in the unfortunate event that the property is foreclosed, HUD becomes the owner of the property and will, in turn, try to resell it.

To encourage buyers to bid on HUD home auctions, the agency often sets prices that are below market value. Additional programs and potential benefits of HUD homes include:

• Dollar Homes: If a HUD home has been on the market for at least 6 months and has a current market value below $25,000, low-to-moderate income families may be able to purchase it for $1.
• Good Neighbor Next Door: This program can discount a home’s price by up to 50% for law enforcement officers, teachers, firefighters, and emergency medical workers who buy homes that are located in revitalized areas.
• Housing Choice Voucher: Often referred to as Section 8, this program can provide a recurring mortgage payment subsidy to very low-income families.
• Early Access For Owner-Occupant Buyers: If you’re planning to make a HUD home your primary residence, you’ll be given a 30-day window to bid on the property before it’s opened up to investors.
• Down Payment As Low As $100: If you’re a qualifying owner-occupant buyer who is using FHA financing, you may be able to qualify for the HUDs $100 Down Program.
• Lower Closing Costs: HUD may pay closing costs on behalf of the buyer up to 3% of the home’s purchase price.

And perhaps the best part about HUD homes is that there are no mortgage-type restrictions. You can use conventional mortgage financing or one of the government-insured programs (FHA or VA) that are typically more suitable for borrowers with limited credit.

How to Improve Your Credit Score Before You Buy a Home

The first step towards raising your credit score is to find out exactly where you stand. You can check your credit reports once per year for free at AnnualCreditReport.com. And there are a few free online tools, such as Credit Karma, that can give you unlimited access to one or more of your reports as well as an estimate of your credit score.

However, if you’re wanting to see your exact FICO Score, you’ll need to go to the source. You can check your FICO Score and credit reports at MyFICO. Subscriptions range from $19.95 to $39.95 per month depending on the number of bureaus covered and how often you’ll receive updates.

1. Dispute Any Credit Report Errors

If you find incorrect information on a credit report, you have the right to dispute the error with both the credit reporting agency and the creditor who provided the information. And if these errors happen to be negative items, removing them could improve your credit score in a significant way.

The FTC recommends that consumers dispute credit card errors in writing. And MyFICO says that it typically takes credit reporting agencies 30-45 days to respond to disputes. So if you’re hoping to buy a home in the next few months, you’ll want to start the dispute process as soon as possible.

2. Pay All Your Bills on Time

While there are multiple factors that influence your credit score, none are more important than your payment history. FICO says that this one factor alone accounts for 35% of your score with its scoring model.

So simply paying all of your credit card bills and other loan payments on time each month will consistently lift your score over time. To help you avoid late or missed payments, consider setting up automatic payments for each of your credit accounts.

3. Use Less of Your Available Credit

Next on FICO’s list of most important credit factors is credit utilization (the amount of your available revolving credit you’re using). It accounts for 30% of a consumer’s overall score. With all other factors being equal, a borrower with a lower credit utilization rate will most likely have a higher credit score.

But how low is low enough? The Consumer Financial Protection Bureau (CFPB) says that aiming to keep your credit utilization rate below 30% is a good starting point.

Let’s say that you have $5,000 in combined revolving credit and you spend $2,500 of that credit per month. In this case, you’d have a 50% credit utilization rate ($2,500 / $5,000 = .50). That’s a fairly high rate that could hold your credit score back. To get your ratio within the CFPBs recommended range, you’d want to reduce your credit spending to no more than $1,500 per month ($5,000 x .30 = $1,500).

4. Avoid Unnecessary Credit Inquiries

Multiple inquiries for new credit within a short period of time can be an indicator of financial stress. Because of this, lenders often equate this with higher risk.

We’ve already mentioned that you can shop for a mortgage with as many lenders as you want within a 14-day span without it having a major negative impact on your credit score. However, you’ll want to avoid unnecessary credit inquiries during the months leading up to that shopping period.

A credit inquiry can impact your credit score for 12 months. So avoiding new credit applications for a full year leading up to your home purchase is the safest strategy.

5. Add Utility Payments (And More) to Your Credit File

Your credit card bills aren’t the only ones that you pay each month. You most likely pay for a variety of other things such as your cell phone and utilities.

If you’ve been consistently paying these types of bills on time, shouldn’t that have a positive impact on your creditworthiness? Experian thinks so. That’s why they offer a unique score-boosting program called Experian Boost™.

With Experian Boost, you can not only add your utilities and phone payments to your credit file, but you can get credit for your streaming service bills too (such as Netflix, Disney+, Hulu, and HBO). It’s free to use and Experian says that the average person who improved their score experienced an increase of 12 points with Boost.

Bottom Line

There are many ways to buy a home with imperfect credit. Deciding which option is best will depend on your circumstances. If you’re a military veteran, a VA mortgage may be your best choice. But applying for a USDA loan may be your best choice if you plan to live in a rural area.

Homebuyers that don’t meet the eligibility requirements for VA or USDA loans may still qualify for an FHA loan or a low-income conventional loan. Just know that with either of the mortgage types you’ll need to make a down payment of at least 3%.

If your credit score is holding you back from each of these mortgage products, you may want to work on raising it before you try to buy a home. Check out our full guide to credit-building to learn all the strategies that could improve your score faster.