How to Buy a House with Bad Credit

Thinking of buying a home, but worried your credit score will hold you back?

While a less-than-perfect credit history can present challenges, it doesn’t necessarily close the door to homeownership. Many people believe that a high credit score is the only path to securing a mortgage, but there are alternative financing options and strategies available to help you achieve your dream.

Can You Buy a House with Bad Credit?

Buying a home with a credit score below 620 is challenging, but achievable with alternative financing and preparation. Lenders assess credit using credit reports and scores. Generally, anything between 300 and 579 is considered “bad credit.” A low score doesn’t mean you can’t buy a house, but it signals to the lender a higher lending risk.

How Does Bad Credit Affect Home Buying?

If you have a low credit score, it can lead to difficulty securing a mortgage. In this situation, a lender is more likely to charge higher interest rates (7-9% vs. 5-6% with a higher credit score) and might require a larger down payment. But a bad credit score isn’t the end of your homeownership journey!

What Are the Best Mortgage Options for Bad Credit?

Fortunately, bad credit doesn’t mean you need to settle on conventional loans in order to purchase a home.

There are many loan programs suited for low credit scores:

FHA Loans: These loans require as low as 3.5% down with a 580 score, or 10% down with a score between 500 and 579.
VA Loans: If you are a veteran or a surviving spouse of one, you can qualify for this kind of loan. These have no minimum credit score requirements for eligible veterans, with flexible terms.
USDA Loans: For rural properties in eligible Northwest or Arizona areas, these loans require a low down payment or no minimum down payment at all.
Non-QM Loans: Though the interest rates are higher, this is an option for those who don’t qualify for a traditional mortgage.

How Can I Improve My Credit Before Buying a Home?

Bad credit doesn’t mean you can’t work to improve your credit score.

Here are some steps you can take today to boost your credit score:

Pay down debt
Correct any credit report errors
Avoid new credit inquiries

Making improvements to your credit score doesn’t have to take long. With the right steps, you can raise your score in 6 to 12 months.

Months: 1-2: Review your credit report and correct any errors that could be lowering your score.
Months 3-5: Pay down any existing debt and avoid new credit inquiries.
Months 6-12: Continue to pay on time in order to build a positive payment history.

Raising your credit score helps you qualify for a mortgage and improves your chances of purchasing a home at a better price.

What Down Payment Is Needed with Bad Credit?

Bad credit often requires higher down payments, with 10-20% for conventional loans and 3.5% for FHA options.

With a proper saving strategy, you can build towards putting enough money down.

Set clear goals and timelines, then stick to them.
Open a high-yield savings account.
Include savings in your monthly budget.
Reduce non-essential spending like subscriptions and dining out.

There are several down payment assistance programs available in Arizona. Programs such as Home Plus, Arizona is Home, and Pima Tucson Homebuyer’s Solution offer up to 4% assistance for down payments and closing costs.

How Do I Find a Home I Can Afford with Bad Credit?

Finding a home that you can afford with bad credit isn’t as hard as it may seem. By setting a realistic budget and factoring in higher interest rates and insurance costs, you can narrow down your search and find options that align with your financial needs.

Not every location will match your budget, but there are plenty of affordable neighborhoods in Phoenix and popular Northwest cities:

Phoenix: Avondale, Goodyear, El Mirage, and Tolleson are noted among the top affordable areas around Phoenix.
Washington: Tacoma, Spokane, Yakima, and Port Angeles are often more affordable than big cities like Seattle.
Oregon: Pendleton, La Grande, Baker City, and Klamath Falls are affordable, but farther from big cities.

What Role Does a Real Estate Agent Play in Buying with Bad Credit?

Century 21 Northwest’s agents assist you by:

Identifying lenders who accept lower credit scores.
Finding properties within budget and negotiating terms.
Guiding clients through paperwork and closing.

What Are Common Mistakes to Avoid When Buying a Home with Bad Credit?

While buying a home with bad credit is possible, there are a few common pitfalls that could hinder the process. Applying for multiple loans at once will lower your credit score. Ignoring closing costs, which can be 2-5% of the home’s price, will hurt your budget. Skipping pre-approval puts you at a higher risk of rejection. Working with a real estate agent can help you avoid these mistakes.

How Can Century 21 Northwest Help Me Buy a Home with Bad Credit?

Ready to turn your homeownership dream into a reality, even with bad credit?

Contact Century 21 Northwest today for a personalized consultation. Our experienced agents are ready to connect you with lenders, find the perfect home within your budget, and guide you through every step of the process.