One of the most common questions people ask real estate agents is, “What credit score do you need to buy a house?”
It’s a great question. Experian reports the average credit score in the U.S. is currently 714 as of 2021—and those numbers are steadily rising year over year. That’s a good credit score to buy a house, although by no means the lowest lenders will accept.
With some lenders, you can take out a mortgage with a score as low as 620. But according to BadCredit.org, 16% of Americans have a credit score of less than 580. That means a huge chunk of individuals are unable to obtain a mortgage, thus, making buying a house or real estate investing a difficult task.
However, many people don’t know that there are alternative loan options if you don’t meet the minimum credit score requirements.
Minimum Credit Score to Buy a House By Loan Type
What is a good credit score to buy a house varies depending on the type of loan you want to apply for. These are the credit score requirements for the main loan types available to home buyers.
If you’re looking for a traditional fixed-rate mortgage, you will likely need a FICO score of 620+. In fact, many lenders will require a credit score of 700+ for a conventional or traditional loan. A conventional loan is a mortgage loan that isn’t guaranteed or insured by the government.
An FHA loan is a Federal Housing Administration loan and is insured by the government. Because they are insured, FHA loans are available to applicants with lower credit scores than usual. A 580+ credit score qualifies for 3.5% down (lower than 580 may require 10% down). Some FHA loans may be available to applicants with a credit score of as low as 500.
VA loans can be accessed through the Department of Veterans Assistance (formerly known as the Veterans Administration). They are open to veterans, those in service, and their spouses. Most lenders want to see credit scores of 580–620. The biggest advantage of VA loans is that they typically require no down payment.
USDA loan is run by the US Department of Agriculture and is run by the Rural Development Guaranteed Housing Loan Program. These loans are available in rural and small-town areas without a downpayment. Most lenders want to see a credit score of 580–640 to qualify for this loan type.
Fannie Mae HomeReady
Fannie Mae HomeReady loans are designed for low and moderate-income borrowers with good credit scores. They offer lower down payments than traditional loans. For example, a borrower with a credit score of 620+ can qualify for a 3% downpayment.
Jumbo loans are loans issued on higher-priced properties, typically those priced over $650,000. These loans are issued by private financial institutions. Their main advantage is that it allows a borrower to take out a loan that’s larger than the limits set by the Federal Housing Finance Agency (FHFA). Borrowers indeed have a credit score of 700+ to qualify for jumbo loans.
Understanding Credit Scores
While there are multiple methods for scoring credit, FICO defines credit ranges as follows:
- Poor: 579 and lower
- Fair: 580–669
- Good: 670–739
- Very good: 740–799
- Exceptional: 800+
The truth is that credit score merely represents your financial ability to manage your money. If you fall into the poor or fair range, you may need to do extra work to prove you are worthy of a home loan. Working to improve your credit is your best option.
How credit scores affect mortgage rates
Your credit score directly impacts the mortgage rates that will be available to you as a borrower. The higher your credit score, the lower the interest rate a lender will offer you on your mortgage. The differences in mortgage rates offered can be quite dramatic. While someone with a stellar credit score of 700 and higher will have access to the widest variety of mortgage products with the lowest interest rates available on the mortgage market.
By contrast, someone with a score of under 700 will be offered a mortgage interest rate of 0.399 percentage points higher, translating into tens of thousands more in mortgage payments over a typical twenty-year mortgage term.
What makes up your credit score
When a lender gets your credit score, they can see several elements that make up your credit score. The credit report will show your payment history, outstanding debt amounts, the length of your credit history, new credit (recent hard inquiries into your credit score by lending companies or by yourself), and credit mix (the different types of loans you currently have).
The most important elements on this list are your payment history and your outstanding debt amounts, making up 35 and 30% of your credit score, respectively. However, all of the elements contribute to your credit score, so if you are after one of the loan types requiring a higher credit score, you’ll need to pay attention to them.
How to Increase Your Credit Score to Buy a House
Bank loans may be tough to get, but it’s hard to beat the low-interest and long terms that a bank can provide. Maybe today you don’t need it, but down the road, once you choose to invest in real estate on a larger scale, you are going to wish you had great credit.
There are a billion articles on improving one’s credit score, so there is no need to go too deep on that here. But the following tips should help:
- Commit to fixing your debt problem. This will not be easy. Are you willing to do what it takes? Debt consolidation can be a good option and will require you to take out a loan to pay off your existing debt. The advantage of a debt consolidation loan is that it will allow you to eliminate multiple sources of debt with unfavorable interest rates. Do not start putting money into savings until you have eliminated your debt.
- Start making more income. Yes, that means you might have to work extra hours or find other ways to hustle. You must get current on all outstanding debt and pay off what you can. There are ways to make the extra passive income you may not be even aware of, like renting out your driveway for parking or selling stuff you don’t need to eBay.
- Lower your balances. Ensure the balance on your revolving debt is less than 30% of the limit. High debt-to-limit ratios make your credit worse.
- Stop applying for credit. Seriously, stop. It hurts your score. Every time a lender makes a ‘hard’ inquiry into your credit score, it affects your existing score. So, be wise about how many loan applications you make.
- Pay everything on time, no matter what. It shouldn’t matter if your child is sick and your leg falls off on the way to bring him to the hospital. You need to pay every bill on time. If you can’t pay a bill on time, you can often work something out (e.g., an installment plan), but you must contact the billing provider in advance.
- Consider getting a secured credit card. Once your debts are current or paid off, consider obtaining a secured credit card. A secured credit card has a maximum limit of whatever dollar amount you deposit with the lender. In other words, you give the bank $500, and then they give you a $500 credit card. Use this to buy your gas, groceries, and a few other things—and then pay it off in full every month. This is your way to start building trust with the credit world.
Repairing your credit is going to take time. There is no doubt about it. But if you commit to the process, it can be done. Soon, bad credit will be just a memory.
Can You Buy a House With Bad Credit?
So, can you buy a house with bad credit? Well, the answer is: yes, but you should think carefully before trying. The good news is, yes, you can invest your money in real estate with bad credit, and we explain how to do this in this post. The real question, though, is whether you should. Only you can answer that once you’ve armed yourself with the facts.
Here are the main strategies for buying a house with bad credit.
1. Try a partnership
Partnerships are one of the best ways to invest in real estate because everyone has something they lack. Partnerships help fill that void. For you, perhaps it is your bad credit, but maybe you have something that your potential partner doesn’t have. Time? Skills? Hustle? What can you bring to the table to help them achieve their goals while you achieve yours?
Of course, when it comes to partnerships, one must be careful. Do your homework, vet your partner carefully, and as is true with all these tips, only invest in great deals.
2. Consider seller financing
Seller financing is the process in which the seller agrees to finance the property rather than making you obtain a new loan. In essence, the seller agrees to let you make monthly payments to them until the property is paid off (or the term of the seller-financed loan ends).
Seller financing can be powerful, as sellers typically will not ask to see a credit score. However, a seller-financed deal is best when the sellers own the property free and clear. In other words, they should not have a mortgage on the property. If they try to “carry the contract” on the home that they have an existing loan on, their lender could foreclose due to something known as “the due-on-sale clause.” So look for deals where the owner has no mortgage.
Seller financing will likely become increasingly popular in the coming years as baby boomer owners of rental properties will be looking to get out of the game and hold on to their monthly income. Seller financing offers a great win-win solution for all parties.
3. Look into hard money lenders
Hard money lenders are individuals or businesses who lend money at high-interest rates and short terms to real estate investors. Hard money rates vary but typically fall between 10% and 18% interest, with less than two-year terms (often just six months). In addition, hard money lenders also charge large fees, known as “points,” which can add anywhere from 3% to 10% of the loan amount. Many hard money lenders used to be investors themselves but have moved to the more passive method of simply lending.
Sounds nice, doesn’t it?
Because of the high rates, high fees, and short terms, hard money is ideal for house flippers and those looking to do the BRRRR (buy, rehab, rent, refinance, repeat) method of real estate. This way, the real estate investor can be in and out quickly, cashing out the hard money lender and moving on to the next project.
Hard money lenders rarely look at the borrower’s credit score, though it is becoming more common. In reality, the hard money lender cares most about the security in the deal. They want to know that no matter what happens, they will make money. If the borrower defaults, can they foreclose and sell the property for more?
If you have a low credit score but want to flip houses, hard money might be a great option. Just be sure to find an incredible deal so the lender feels secure, and then rock that flip and make your money.
4. Explore private money lenders
Similar to hard money, private money lenders are individuals you might know and are looking to achieve a good return on their investment. Unlike hard money lenders, private money lenders are not typically real estate professionals who lend money for a business. They are looking to diversify their cash into other investments. Private money lenders might be your dentist, mom, neighbor, or someone you’ve built a relationship with on BiggerPockets.
The keyword with private money is relationship.
When dealing with other people’s money, it’s unlikely they will ask you for your credit score. However, this means you must work even harder to make sure they receive the kind of return on investment they are looking to make.
This is when the discussion earlier about a credit score as a symptom comes into play. Don’t take advantage of Grandma’s kindness and lose all her money. In fact, never take money from anyone who couldn’t afford to lose it. That would make for an awkward Thanksgiving dinner.
5. Check out wholesaling
Wholesaling is the business of finding great deals, putting them under contract, and quickly “flipping them” to a cash buyer for a higher amount. Many wholesalers do this process without using a single dollar of their own money or needing their credit checked.
This probably sounds amazing to you, but before you head out the door looking for a good deal, understand a few things:
- Wholesaling is a job. It is NOT passive, and you don’t get paid if you don’t work! Most would say wholesaling isn’t even investing since you are not buying or selling the property.
- Wholesaling is hard. It requires time, patience, and great marketing skills. You also must have the ability to talk with sellers on the phone, sell yourself as a credible solution to their problems, estimate rehab costs, find cash buyers, and put the whole thing together without it all falling apart. In other words, wholesalers need to be good at the entire world of real estate investing. It’s not an easy task, and most people who try to wholesale never do a single deal.
- There are legal implications regarding wholesaling and the need for a real estate license. Simply put, you should probably get your license.
A low credit score doesn’t mean you can’t buy a house—or invest in real estate. It just means you need different strategies. And you should also carefully consider whether buying property is the right solution for you right now.
Ready to get your first property in 90 days?
When you’re a rookie, real estate investing can seem overwhelming. This comprehensive guide gives you everything you need to buy your first property within 90 days!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.