If you’re in the market for your first home, you’ll be in the best position if you’ve got good credit. However, it’s not impossible to buy your first home if your credit score needs help — far from it. You should prepare to jump through a few extra hoops or swallow some extra monthly fees, but it might all be well worth the effort if it means getting your foot on that first rung of the homeownership ladder.
“There’s a reality that not everyone has perfect credit, or great credit, or even good credit,” says Tony Baroni, a top-selling agent serving Tampa Bay and Orlando, Florida. “There’s always a way to get financing.”
First, it’s about getting connected with the right agent and lending team and evaluating your specific situation. “I always tell our buyers, we need to find out where we are so we can figure out where to go,” he says. “If we have some issues going on, there’s a solution to every single one.”
Indeed, if you’re a first-time homebuyer with bad credit, you have plenty of options — you just need to know what they are. For help, read through our primer — which we broke down by credit score and filled with expert tips — and learn how first-time homebuyers with bad credit can get into the game and start building wealth through real estate.
One note: Lenders have been increasing loan standards by imposing mortgage loan overlays in the wake of the coronavirus pandemic, additional standards above and beyond those required by the government. Although these are the minimum credit scores outlined in the various programs mentioned, individual lenders can and do require higher credit scores or bigger down payments when the loan environment is riskier. Talk to your real estate agent and your loan officer about your options right now.
If you have… no credit score
Even if you have no credit score, you may be able to get a Freddie Mac Home Possible loan, made for borrowers with very low to moderate income — first-time homebuyers; move-up borrowers; and retirees — with as little as 5% down.
Let’s translate that into some real numbers: Based on the Q3 2019 median home price of $310,900, a 5% down payment would be $15,545.
Borrowers with no credit score can qualify for these loans if they pass a special underwriting procedure. Only the borrower’s own income can be included to determine eligibility, here; spouses, or any other family members who won’t be a borrower on the mortgage, can’t include their income.
And with this loan, income is limited to 100% of the area median, unless you’re in a low-income area.
If you have… a credit score of 580 or less and no down payment
You might qualify for a Veterans Affairs (VA) loan if you’re a veteran. While the VA doesn’t set a minimum on this type of loan, some lenders will consider credit scores starting at 580. (Most want to see a minimum credit score of 620.)
The biggest appeal of a VA loan is that it’s easier for vets to get financing through no-down-payment loans and less stringent credit and income requirements than conventional mortgages.
For this type of loan, however, you will have to pay a one-time funding fee, meant to help offset taxpayers’ costs. This fee varies, but a first-time buyer with no money down could pay a fee of 2.15% of the loan amount. The fee goes down with the size of the down payment. (Reservists and National Guard members pay slightly more in fees than active duty members,)
A word of caution: With this loan type, your budget will be tight, and your financing might not seem fully buttoned up to some sellers. So you may have trouble finding that home. (Be patient!)
If you have… a credit score between 500 and 579 and 10% down
In this category, you can get a Federal Housing Administration (FHA) loan, backed by the government and intended for homebuyers who might have trouble otherwise qualifying due to lower credit or down payment ability. With a minimum credit score of 500 and 10% down — that’s $31,090 for the Q3 2019 median home price — you can qualify.
An FHA mortgage requires an upfront fee of 1.75% of the loan amount, which you can pay in cash at closing or roll into your loan payments. In addition, you’ll pay a monthly premium added to your mortgage payments; this varies from 0.45% to 1.05% of the loan amount each year.
But your mortgage insurance payment may be canceled after you gain a certain amount of equity, usually 20%. It cancels automatically after that equity gets to 78% of the home’s purchase price.
If you have… a credit score of 580 or more and 3.5% down
With a minimum credit score of 580, you may be able to get an FHA loan with a smaller 3.5% down payment. You will likely have to pay mortgage insurance for the duration of the loan unless you refinance once your property has gained sufficient equity or unless you put at least 10% down.
If you have… a credit score of 620, 3% down, and do not exceed area income limits
With personal stats in this category — where, as a reminder, 3% of that median home price is $9,327 — you can get a Fannie Mae HomeReady loan. This type of loan is meant for lower-income borrowers (defined as those that make 80% or less than the Area Median Income, as set by Fannie Mae); first-time (or repeat) buyers; a buyer with a roommate, boarder, or other supplemental rental income; folks with limited cash for down payment, and a credit score of 620 or up. (If you have 680 or better, you might get even better pricing.)
Unlike government-insured loans with a lower down payment, this loan gives borrowers a chance to cancel their mortgage insurance once their home equity reaches 20%, which can reduce monthly payments.
For this type of loan, your down payment and closing costs can come from a variety of sources, including gifts and grants. And, if you live in a low-income area, you may not have to meet the median salary requirement.
If you have… a credit score of 640, and no down payment
Buyers searching for homes in rural areas potentially qualify for United States Department of Agriculture loans, or USDA loans. For these, 640 is the minimum recommended credit score.
This type of loan is backed by the government, like FHA and VA loans. This type of borrowing does come with a one-time upfront fee, known as the USDA guarantee fee, which is 1% of the loan amount. There’s also an annual fee, currently 0.35% of the loan amount, which can be financed into the monthly payments to keep that down payment to $0.
These types of loans are restricted to homes located in what the USDA defines as a rural area.
If you have… a credit score of 660, 3% down, and do not exceed area income limits
If your credit score is 660 or above and you make less than the income threshold (here again, less than 80% of the Average Median Income, as set by Freddie Mac), you may be able to get a Freddie Mac Home Possible with just $9,327 down. You may even be able to qualify with a lower or no credit score if you have a higher down payment of $15,545, based on the median home price. With a down payment as low as 3%, you’ll also pay mortgage insurance on this loan unless you can get that down payment to more than 20%.
And be aware: If you live in a low-income area, your HomePossible income limit may actually be higher than the median salary in the area.
To improve your chances of getting a loan…
As you can see, there are ways of entering into first-time homeownership without excellent credit — and “first-time homebuyer with bad credit” is far from an oxymoron! But if your credit isn’t in great shape and you’re looking to buy a home in the future, now is always a great time to start working to improve your credit.
Pay your bills on time, keep your balances as low as you can on credit cards, and pay off as much high-interest debt as possible. Be sure to get a copy of your credit report and dispute any issues that could ding your credit.
If you’re someone who just doesn’t have adequate credit — or any credit — Baroni suggests steps to start building it right now.
“You could get a secured credit card, which is like a debit card that acts like a credit card and starts building your credit — it’s your own money on a card,” he explains. “You could get a couple of those immediately.”
You might also switch, say, a boyfriend’s or girlfriend’s bill over to your name — or add yourself to it. “It’s just a couple of little things like this,” he says, “that can make a big difference toward establishing that credit.”
In short, even if you have bad credit, don’t count yourself out of the first-time home buying experience — far from it. “A great agent has a network set up for just about everything, so go ahead and make the call,” Baroni suggests to would-be buyers.
Get connected with a mortgage professional to evaluate where you are — it’s easier than you might think: “People think of the process as very daunting, yet it’s very simple,” he says. “It’s just 15 minutes on the phone with a mortgage lender, not sitting in a bank all day.”
You might be ready to buy right now with your credit as it stands — or at least you’ll be setting yourself on the right path for the near future. “Figure out where you are,” he recommends, “so in a year or two from now, you’ll be ready to go to get pre-approved and make that purchase.”
Header Image Source: (Ingrid Martinussen / Unsplash)