In 2017, mortgage lenders denied one-third of loan applicants. The reason?

Having a less-than-stellar credit score.

Even smaller personal loan borrowers didn’t have much chance for approval back then. Three-quarters of those who applied for such loans also got denied. Yes, these people also had bad credit ratings.

So then, where does that put the 30% of Americans who have bad credit?

If you’re one of these individuals, you’re likely thinking you can no longer buy a house with bad credit. Although it’ll be more difficult than if you had a better credit score, it’s still doable.

And we’re here to show you how you can do that. Read on to learn the most important stuff about home purchases with bad credit!

1. You Can Buy a House with Bad Credit

Let’s get things straight early on: It’s true that you can buy a home with bad credit. It takes more work though, but yes, you can still get approved for a loan to help you finance your home purchase.

Consider this. In 2018, the United States was home to 127.59 million households. Around the same time, only 59.9% of scoreable folks had a FICO credit rating of “Good” to “Exceptional”. Their scores ranged from 670 to 850.

As for folks with a VantageScore, less than two-thirds of them have “Fair” to “Excellent” scores. They have scores between 650 and 850.

As you can see, about 40% of people under these scoring models have less than stellar scores. That’s a considerable size of the market, and lenders will lose money if they ignored that crowd.

That’s why they still offer some level of help for those with scores below what they consider “Good” or “Fair”. In short, those with poor or bad credit can still get some credit from these lenders. It may not the exact amount they want to borrow, but it’s better than getting denied.

2. FHA Lenders Are Your Best Friend

FHA stands for Federal Housing Administration, a U.S. government agency. It doesn’t issue FHA loans itself, rather, it backs or guarantees these loans. If an FHA borrower defaults on the loan, the agency pays the lender.

This backing from the government is what makes lenders more willing to issue home loans. Especially in cases wherein they won’t, such as applications from bad credit borrowers. They have a way to get their money back, so FHA loans have more relaxed borrowing requirements.

If your FICO score is 580 or above, you can qualify for an FHA loan with a 3.5% down payment requirement. If your score is between 500 and 579, lenders will need you to make at least a 10% down payment.

You also need to get a Mortgage Insurance Premium (MIP). It’s one of the FHA requirements for borrowers who can’t make a 20% down payment. Other requirements include steady employment, paycheck stubs, and other financial documents.

Because of the lower credit score requirements, an FHA loan can be your best way to buy a house. It’s also ideal for home buyers with low income.

3. Help for Your Down Payment is Also Available

The old adage “put down of at least 20%” still works in today’s market. The larger your down payment is, the lower your total mortgage costs will be. This also lowers your monthly mortgage payments, helping you avoid late payments.

As helpful as this is when preparing for a home purchase, a 20% down payment can still be too big. And what if you can’t still afford the mandatory 10% or even the 3.5% down with an FHA loan?

Don’t worry, as down payment assistance programs exist for such cases. Local and state housing authorities, as well as lenders, offer these programs. They can provide you with a small loan so you can achieve your targeted down payment amount.

4. Consider a Subprime Loan

If you don’t meet the FHA loan requirements, a subprime loan may be your next option. Most mortgage brokers offer these loans for those with poor or bad credit.

They do have higher interest rates than FHA and other mortgage programs though. So, be sure that your monthly budget can afford the monthly payments.

A subprime loan can also help you strengthen your credit score, so long as you make payments on time. After a few years of good payment, your score may have improved enough for a good refinancing deal.

5. Sign Up for An Adjustable Rate Mortgage

Adjustable rate mortgages are often easier to secure than a fixed-rate loan. Their lower initial interest rates can also make monthly payments pocket-friendlier.

But as their name suggests, the rates of these home loans can change, depending on market factors. After the initial low-rate period, they can go higher than rates for FRMs.

If you’re sure that you can raise your credit score before the low-rate period expires, an ARM may be a good option. That way, you can refinance and get a better deal before the lender increases your interest rate.

6. Get a Cosigner

If you’re a Millennial home buyer, your credit may either be too low or not enough for lenders. A cosigner who has an extensive (and good) credit history can help raise your approval chances. If your folks have an impressive credit history, consider asking them to be your cosigner.

7. Make Your Credit Score More Appealing to Lenders

While there are several ways on how to buy a house with bad credit, a better credit score should be your top priority.

So, get a copy of your credit report to see where you stand and if there are any errors on it. This is very important, as 20% of consumers have an error in their credit files. If you see any mistakes, report it immediately as it may be making your credit score appear riskier than it is.

Otherwise, you may want to put off buying a house for a bit longer and paying off your credit card balances first. Avoid making any more late payments and don’t take out any more loans. Doing all these can help you bring your credit score higher, which makes it more appealing to lenders.

Homeownership is Possible Even with Bad Credit

As you can see, it’s possible to buy a house with bad credit, thanks to FHA loans and down payment help programs. But again, it’s best to get your credit score polished first before you close. If you want to make the move to a new home ASAP though, consider the other methods we’ve listed above.

Once you receive the green light from a lender, time to get shopping! And while you’re looking at prospective homes, use this guide we have on when to walk away from a deal. It’ll help you avoid a potential home buying disaster.