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Real Estate Enthusiasts

Think you can’t buy a house with bad credit? Think again

Your credit plays a huge part in your ability to get a mortgage. It influences what loans you’re eligible for, how much you can take out, and how much you’ll pay in interest over the life of your loan. However, it is still possible to buy a house with bad credit.

If you’re planning to buy a house, steer clear of these all-too-common credit myths that could hold you back:

Myth 1: You need perfect credit.

Perfect credit would certainly make getting a loan easier (and cheaper), but it’s not a requirement by any means. FHA loans require just a 500 credit score, as long as you can make a 10% down payment, while VA loans have no credit score requirement whatsoever.

According to the most recent data from mortgage technology provider Ellie Mae, the average FICO score on a purchase loan was 752 in August 2020. That means almost half of all borrowers had a score of 749 or less.

Myth 2: You can’t buy a house if you have lots of student loan debt.

Just having debt isn’t the problem. It’s how much debt you have and how you manage it that matters to lenders. To see if your student loans will be a problem, it’s important to consider your debt-to-income ratio—or how much of your monthly income your loans and other debts take up. 

Most lenders want to see a 43% debt-to-income ratio or lower, including your new monthly payment. In some cases, you may be able to go up to 50% if your credit is good. 

Myth 3: You don’t have credit at all.

Many first-time buyers have never taken out a credit card or loan before, and therefore they have no credit score at all. While this does make it harder for a lender to judge a borrower’s risk, there are ways around it.

Bringing in a co-borrower, for example, can be a big help—especially if they have a good credit score. Making a bigger down payment can also help your chances.

Credit score matters, but it’s not everything

You can buy a house with bad credit, but your credit definitely matters when buying a home, so make an effort to increase your score and settle any overdue accounts before filling out a mortgage application. Just remember: A perfect score isn’t everything. If your score’s less than ideal, talk to a loan officer about ways you can improve your application. There are usually several ways to do it.

3d rendering of a row of luxury townhouses along a street

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