Can you buy a house with bad credit?

Many people believe getting a mortgage with bad credit is impossible. However, a low credit score doesn’t guarantee you’ll face a loan denial when applying for a mortgage. Several factors will affect the decision, so your best bet to see if you'll qualify for a loan is to talk to a lender. Many lenders will have a conversation with you about your eligibility, with no obligation to apply for a loan.

‘What credit score do I need to buy a house?’

The answer to this common question is, “It depends.”

First, let's take a look at the credit score ranges from FICO:

• Exceptional credit = 800 and above
• Very good credit = 740 to 800
• Good credit =670 to 740
• Fair credit = 580 to 670
• Poor credit = under 580

Each lender has their own credit requirements. Even if your score is on the lower end of the range, you may still have options for buying a home.

The minimum credit score you'll need depends on the loan type. For example, the minimum required score for conventional loans is 620. But the FHA loan program allows for credit scores of 580. If a low credit score is a concern for you, an FHA loan might be your best bet. (But remember, each lender sets their own requirements lenders may also have different requirements based on other factors, such as your down payment amount or income.)

Prospective homeowners with bad credit could also consider purchasing a home with a co-borrower.

Fixing or preventing bad credit

If your credit score isn’t too low, it still may be possible for lenders to give you a loan. But be aware that you may pay a higher interest rate and more fees, because borrowers with lower scores are considered more likely to default (that is, fail to pay the loan back).

It's in your best interest to improve your credit score so you can get a lower interest rate, which can actually save you thousands in the long run.

Mortgage lenders look at the "age," dollar amount, and payment history of your different credit lines. That means opening accounts frequently, running up your balances, and not paying on time can impact your credit score negatively. Just changing one of these components of your spending behavior can positively affect your credit score.

You can take steps to improve your credit score: paying down your debts, paying your bills on time, and disputing possible errors on your credit report. But on the flip side, there are ways you can also hurt your score, so remember:

• Don’t close an account to remove it from your report. (This tactic doesn't work.)
• Don’t open too many credit accounts in a short period of time.
• Don’t take too long to shop around for interest rates. Lenders must pull your credit report every time you apply for credit. But good news: If you’re shopping around with different lenders for a lower interest rate, there’s generally a grace period of about 30 days before your score is affected.

Even if you have reversed the downward spiral of your credit history, you might want to warn a prospective lender about signs of bad credit in your report. 

Why were you turned down for a loan?

If you’re still having trouble getting a loan, ask your lender why. You should receive a notice that identifies the credit reasons why your loan was denied. Bad credit is just one of many reasons you may be denied a loan. Other reasons you may be denied a home loan include:

• Bankruptcy. Filed for bankruptcy in the past seven years? You might have trouble getting a loan.
• Overdue taxes. Lenders check your tax payment record.
• Legal judgments. If you have a judgment against you for such things as delinquent child support payments, it could harm your credit.
• Overreaching. You might be seeking a loan outside what you can reasonably afford.