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How to Buy a House With Bad Credit but Good Income

A home is one of the largest purchases a person will make in their lifetime. Most people can’t afford to pay cash for a house, which means using a mortgage loan to borrow money to fund the purchase.

If you have bad credit, it can be hard to qualify for a loan. However, if you have good income, there may be options for you if you want to buy a home.

How to Buy a House with Bad Credit but Good Income

If you have poor credit, a good income, and you want to buy a home, there are a few ways you can convince a lender to give you a mortgage.

One option is to make a larger than usual down payment. This reduces the lender’s risk and may convince them to give you a mortgage.

The other is to use a special type of loan, like an FHA loan, that has less stringent requirements than a conventional mortgage.

What Do Mortgage Lenders Consider A Bad Credit Score?

Generally speaking, mortgage lenders consider credit scores below 670 to be bad. This is considered a “subprime” credit score

Most of the time, a credit score can range from a low of 300 to a high of 850. The higher your credit score, the better.

Every lender has different standards when it comes to making lending decisions, but most agree on similar ranges when evaluating a borrower’s credit scores.

Your credit score will depend on many factors in your credit history, including your credit card debt and your payment history on other loans such as student loan debt or auto loans, and other factors.

It’s also important to keep in mind that you have more than one credit score. There are dozens of credit score formulas out there and each weighs the information in your credit report differently.

According to Experian, one of the major credit bureaus in the United States, the credit score ranges are:

  • 300 – 579: Poor
  • 580 – 669: Fair
  • 670 – 739: Good
  • 740 – 799: Very Good
  • 800 – 850: Exceptional

Most lenders will focus on customers who have a score in the “good” range or better. There are loan options for people with fair scores, but interest rates and fees will increase significantly as your score begins to fall into that range.

Any score under 760 will mean settling for less than the best available rates. If your interest rate rises too high, it can make a home loan unaffordable, forcing you to make a larger down payment to reduce your monthly costs or wait until your credit score rises.

Can You Buy a House with Bad Credit?

Yes, it is possible to buy a home with a bad credit score. However, it can be harder to qualify for a loan and it will likely be much more expensive than a loan offered to someone with good credit.

If you do manage to qualify for a loan with bad credit, the lender will likely want you to make a larger down payment. For example, if an FHA loan typically requires a 3.5% down payment, you might have to make a 10% down payment to qualify if you have bad credit.

The larger the down payment required, the more cash you need on-hand to purchase a home.

Having poor credit also means paying a higher interest rate. Where a borrower with stellar credit might get a mortgage at 3%, someone with poor credit might wind up with an interest twice that or even higher.

The interest rate of your loan will affect both the overall cost of the mortgage and the monthly payment you have to make. If the rate is too high, you may not be able to afford the monthly cost of buying a home.

Of course, there is also the possibility that your credit will be too low for any mortgage lender to consider offering a loan. This can happen if you have a recent bankruptcy or other negative information in your credit report.

If your credit score is truly dismal, you may have to work to improve it before you’re able to get a loan, regardless of your income.

Lender Options You Have with Bad Credit:

Conventional Loans

A conventional loan is a standard mortgage that isn’t offered through any special government program. These loans can come from a bank, credit union, mortgage broker, or other traditional lenders. 

Typically, lenders want applicants to meet minimum credit score requirements. Each lender can set that minimum credit score independently, but a minimum of 620 or so is typical. Lenders are also free to set their own down payment requirements for conventional loans.

If your down payment is less than 20% of the home’s value, you usually have to pay private mortgage insurance each month. Private mortgage insurance adds to the monthly cost of your loan.

Getting a conventional loan with bad credit can be difficult. To have any chance, you’ll need to find a flexible lender and be ready to offer a large down payment. Also, be ready to accept a higher interest rate for the loan.

FHA Loans

An FHA loan is a special type of loan for people who have poor credit or limited funds to make a down payment.

If you have a credit score of 580 or more, you can qualify for an FHA loan with just 3.5% down. If you have a score between 500 and 579, you’ll have to offer a 10% down payment.

You also have to have a debt-to-income ratio under 43% and use the loan to buy a primary residence. You can’t use an FHA loan to purchase an investment or vacation property.

FHA loans are insured by the government, which is why FHA lenders are willing to accept borrowers with poor credit. 

If you can meet the program’s minimum credit score requirements, an FHA loan can be a good way to purchase a home. If your credit improves, you can always refinance the loan to one that doesn’t require private mortgage insurance or one that has a lower interest rate.

VA Loans

If you can meet the program’s requirements, a VA loan is a great way for people with bad credit and good income to purchase a home.

Administered by the VA, VA loans are designed to help veterans and active service members purchase a home. The program allows for low down payments and has no minimum credit score requirement. However, if you have poor credit, expect to make a higher down payment.

To qualify for a VA loan, you must meet one of these requirements:

  • Served 181 days of active service during peacetime.
  • Served 90 consecutive days of active service during wartime.
  • Served more than 6 years of service with the National Guard or Reserves.
  • You are the spouse of a service member who lost their life in the line of duty or as the result of a service-connected disability.

If you aren’t a veteran or member of the armed forces, you won’t be able to get a VA loan.

USDA Loans

The USDA loan program is one that’s designed to help borrowers purchase a home in rural areas. The program is administered by the US Department of Agriculture.

Lenders offering loans through this program typically look for a minimum credit score of 640. However, if your score is below that, you may be able to qualify by providing supplemental information.

For example, you may be able to qualify by showing consistent rent and utility payments. 

However, lenders are free to charge higher rates or expect larger down payments from people with poor credit scores.

To qualify for a USDA loan, you also have to meet these requirements:

  • Have U.S. citizenship (or permanent residency)
  • Apply for a loan that will have a monthly debt payment of no more than than 29% of your gross monthly income
  • Your debt-to-income ratio can’t exceed 41%
    • If you have good credit (over 680), you may be able to secure a loan even with a higher debt-to-income ratio
  • A history of dependable, consistent income, typically for a minimum of 24 months
  • An acceptable credit history, with no accounts placed in collections within the last 12 months. The USDA may consider extenuating circumstances if you have poor credit due to issues outside your control

How Does Bad Credit Affect Me?

Having bad credit can affect you in many ways.

The most obvious way is that bad credit makes it hard to get a loan. If you have poor credit and want to get a mortgage, you’ll likely have to work with a specialist lender instead of a traditional one.

You’ll have to work closely with the loan officer to make sure you can provide all of the information they ask to show that you’ll be able to make the monthly debt payments.

Beyond making it hard to get a mortgage application approved, a lower credit score means a much higher monthly mortgage payment. Your mortgage rate will increase significantly as your credit score drops.

If you apply for a $300,000 30-year mortgage, you’ll wind up paying a bit more, as you can see below.

Mortgage Loan Payments by Credit Score

FICO ScoreAPRMonthly PaymentTotal Interest Paid
760-8502.596%$1,200$132,141
700-7592.818%$1,236$144,800
680-6992.995%$1,264$155,041
660-6793.209%$1,299$167,596
640-6593.639%$1,371$193,387
620-6394.185%$1,464$227,193
Source: the MyFICO Loan Savings Calculator based on rates in August, 2021

If you have a good credit score, your $300,000 loan will only cost you $1,200 a month. With fair credit, you’ll pay $1,464 per month, an increase of 22%. Over the life of the loan, you’ll pay almost an extra $100,000.

If you have a low credit score, the rates will be even higher, driving the cost of the loan by even greater amounts.

How to Improve Your Credit Score

If you’re looking to buy a home, one of the best things you can do to make the process easier is to boost your credit score.

No matter which credit scoring model your lender uses to assess a new borrower, there are some basic steps that you can take to give yourself a higher credit score.

Your credit score depends on five factors:

Get a Credit Strong Credit Builder Loan

Credit Strong is part of a 5-star FDIC insured bank. Credit Strong offers special installment loans to rebuild credit. These loans, called credit builder loans, work a little differently from other accounts that build credit, like secured credit cards.

When you apply for a loan with Credit Strong, you can choose the payment amount and the length of the loan. Credit Strong will put the money aside for you in a savings account, but won’t give you access to the cash.

Each month, you’ll get a bill from Credit Strong. When you make your monthly payment, Credit Strong will report that to each credit bureau. Over time, this will build your payment history and boost your credit score.

Once you finish repaying the loan, Credit Strong will unlock the savings account, making its credit builder loans a type of forced savings program. 

You’ll pay some interest and fees as part of this process, but in the end, you’ll have better credit and some savings you can use.

Credit Strong is highly flexible, which is unusual among credit builder loan companies. You can cancel your loan at any time. This can save you from missing payments and damaging your credit score.

Check out the credit builder loan plans and pricing here. 

Improve Your Credit Utilization

One of the things that affect your credit score is your credit utilization ratio, which compares your overall debt to the limits of your credit cards. The lower the ratio, the better.

The simplest way to do this is to pay down your credit cards. Ideally, you only want to carry a balance of 10% or less of your total credit card limit.

Another way to reduce this ratio is to increase the credit limits of your credit cards. Most credit card issuers make it easy to request a credit limit increase through your online portal, so take a few minutes to request an increase.

In the best case, your score will get a boost thanks to your lower credit utilization. Worst case scenario, the credit card issuer doesn’t increase your credit limit, leaving you right where you started, but no worse off.

Dispute Inaccurate Data on Your Credit Report

If you want to know how to raise your credit score by 200 points, one of the easiest ways is to dispute inaccurate data on your credit report.

It’s surprisingly common for your credit report to contain inaccurate information, such as loans that don’t belong to you or accounts listed twice.

Each credit bureau has a method for reporting mistakes. If you can get incorrect, negative information removed, it can boost your score by a lot. 

Stay Away From Hard Credit Inquiries

Each time you apply for a loan, whether it’s a home loan or otherwise, the lender will ask one of the credit bureaus for a copy of your credit report. The bureau will note that request on your report as a hard inquiry.


Each hard inquiry will drop your score by a few points, so avoid hard inquiries in the time leading up to applying for an important loan.

The good news is that most FICO formulas won’t penalize rate shopping and will group things like home loan or auto loan applications made in a short period of time into a single inquiry on your report.

Conclusion

Buying a home with bad credit but good income can be more expensive, but if you have the down payment and the income to support it, it can be a good way to get on the property ladder. Once you’ve improved your credit, you can always refinance your loan to get better rates.

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