Buying A House With Bad or No Credit

Ben Allen

A person’s credit score is a key part in getting loans, and that includes securing a mortgage. Your score is a major indicator of how financially stable and responsible you are. It tracks how much debt you currently have, your history in making payments, and how long you had financial responsibilities.

A poor or credit score sends a signal to lenders that a person is either financially unable to support debts, or has a history of missing or defaulting on payments; having no credit history suggests that a person is risky, and may or may not reliably pay back debts. Despite all of this, it is possible to buy a house with poor credit, though there might be some undesirable consequences that are a direct result of your low score.

Table of Contents

Why You Have Bad Credit

First, you need to know why you have bad credit, so that you can actively stop making choices that leave you stuck in this rut. Anybody can accumulate bad credit, even if they have a steady and healthy income. If you have never had debt to pay off, or have avoided credit cards until now, it’s quite possible to have a really low score, or perhaps no credit at all. Even though you have done everything perfectly, you might have poor credit because you never established a history of paying off debt.

A more common reason for bad credit is from missing payments on bills/debt, or by failing to repay a debt entirely. If you have ever been extremely late on paying your rent, credit card bills, or on an auto loan, those kinds of mistakes are tracked by credit bureaus and can have a huge impact on your credit score. It is also possible to have a poor credit score through no real fault of your own, such as being the victim of identity theft.

Ultimately, no matter how you got here, your bad credit has an impact on most large financial decisions, especially when it comes to getting a mortgage loan (and the stipulations that come with the mortgage). This barrier can prevent you from buying a home, unless you’re willing to work around it or find alternative ways to secure a loan. Figuring out the cause of your low score can allow you to actively take steps to improving your credit, and avoid the behaviors that landed you here in the first place.

Having A Larger Down Payment

So, you’ve decided you want to buy a house, but due to any number of the reasons mentioned above, your credit isn’t great. The first major solution to securing a mortgage loan is showing the lender you have a substantial amount of money available in the form of a large down payment.

Typically, a down payment of at least 3 percent of the total value of the loan is required to secure a mortgage. Often, the better your credit, the less amount required in a down payment. If your credit is below a 580, it’s possible you might have to pay 20 percent or more in a down payment.

The concept is that the more money you can provide up front, the less of a financial risk you are, as the lender will have less money at risk if you do fail to pay back the loan.  

Trying Different Lenders

Every lending organization has specific requirements when it comes to giving out mortgage loans. They also have their own benefits to accompany those requirements.

The biggest classification difference is bank loans versus a private mortgage loan. Bank loans are nice because they typically have lower interest rates, but also require a high credit score.

Private lenders typically are a bit more flexible with who they give out loans to, but also have additional costs and high interest rates.

Just because a bank or a single lender has declined you for a mortgage doesn’t mean this is the final verdict. Go to different lenders and find all of your options. While one lender might outright reject you, others might simply raise your interest rate or have other stipulations for a loan.

Alternative Loan Options

Depending on your circumstances, different loan options are available. These include: an FHA loan, a VA loan or USDA/RHA loan. Each of these loans are towards a niche audience and have specific benefits for those in need of the loan.

Of these, the most relevant to a younger audience (with no-or-poor credit) who are looking to buy their first home is a Federal Housing Administration (FHA) loan. These loans accept people with low credit, typically in the 500 range, and only require a low down payment. The downside is that they also require mortgage insurance, which can bump up monthly mortgage payments by a fair amount.

A Veterans Affairs (VA) loan is available to military service members and their families to help purchase a home. These loans are very flexible with credit scores, don’t require a down payment and don’t require mortgage insurance.

The United States Department of Agriculture (USDA) Rural Housing Service (RHS) is all about providing loans for people who plan on living in select rural areas. Specifically, they want to provide loans to low and moderate income families to move to rural areas that are identified as being in need of growth. Similar to VA loans, they don’t require a down payment, but if you chose not to provide a down payment, you will have to pay for private mortgage insurance that covers the lender if you fail to pay the mortgage.

Fixing Your Credit

When your credit is bad, buying a home is much more difficult. There will be extra hoops to jump through, extra penalties to pay, and higher interest rates to deal with. If you would rather not deal with that, and buying a home isn’t a must right now, work on building and fixing your credit. Identify the Develop and maintain good financial habits, pay your bills on time, use and pay off credit cards and do what you can to get a high credit score.

If you don’t have any credit, it’s actually very easy to get a high credit score, as the credit bureaus don’t have any information on you. Look for opportunities to use a credit card intelligently so credit bureaus can start collecting your information and can see you are a smart, trustworthy consumer.

In fact, even if you do decide to buy a home with your poor credit, do this anyways. Make sure you pay your mortgage on time, keep up with all of your other bills, and be smart with your credit cards to build your credit back up. That way, the next time you look for a loan, you’ll be in a much more favorable position.

For tips and guides on improving your credit to get a better interest rate, visit our credit score resource and learning center. For help with contacting the bureaus and disputing errors on your credit report, visit our letter template resource center.

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