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How to Buy a Home When You Have Bad Credit

October 13, 2021 | By Reef Merhi

Table Of Contents

Updated March 8, 2022

Have you checked your credit report lately? While no one enjoys having bad credit, there are several bad credit mortgage loans that may allow you to buy a home—whether you're a first-time homebuyer or looking for your next home. If your low income disqualifies you for traditional low down payment mortgages or private lenders refuse to work with you because of your low income and low score, then FHA loans are among the most affordable low down payment options available for people with low incomes who have low to moderate scores. 

This article provides information on how to qualify for an FHA loan despite low credit scores, as well as details about minimum credit requirements, interest rates, what can be financed, and more. It also includes tips on how to improve your score before applying so that you qualify for the best possible rates.

What Is An FHA Loan? 

FHA loans are mortgages insured by the Federal Housing Administration (FHA). This means that if the borrower defaults on their loan, the FHA will reimburse the lender for any losses. Because of this insurance, mortgage lenders are more likely to approve loans for borrowers with low credit scores and low incomes. 

The FHA minimum credit score required is 500, but it is possible to get approved from FHA lenders with a lower score if you have strong compensating factors such as low debt, low monthly obligations, and a high cash reserve.

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How To Qualify For an FHA Loan Despite Low Credit: Tips and Tricks

You can still buy a home even with bad credit. Even with a credit score of 500, you can qualify for a mortgage with an FHA loan.

Working with one of the best mortgage companies Texas offers is the best way to learn about minimum credit scores and income qualifications for loans. Here are some tips for how to qualify for an FHA loan despite credit: 

  • Determine what you need for a minimum score for an FHA loan. There is no single minimum credit score required for all lenders. Instead, each lender has its own minimums based on the pool of potential borrowers they serve. You can find out what your mortgage servicer requires by calling them directly or filling out a quick form with information about yourself. If you have no way to check this information, assume that a mortgage loan with 580 credit score is probably the lowest you can go. 

  • Improve your low credit score before applying for a loan. Going through the pre-approval process can be time-consuming and disappointing if your score is too low to help you qualify for financing. Before filling out applications and paying fees, take steps to get your score higher than 580. Pay bills on time, pay down debt to reduce your debt-to-income ratio, and dispute errors that damage your credit score. 

  • Increase the down payment to reduce how much you need to borrow. A more significant down payment can help you overcome a low credit score during the mortgage pre-approval process. 

  • Work with a low-credit specialist and expert mortgage lender to find the best options. The right Texas mortgage company can help you understand minimum credit score requirements and other things lenders look for to approve buyers for a home loan. 

If you had an FHA home loan in the past, then your low credit score may not be a problem because you can reapply after 24 months. Working with a low-credit specialist with direct connections in the mortgage industry may also help you qualify, even if your score falls short of what is required by your servicer or lender. 

In most situations, working with one of the best lenders for low-income FHA loans in Texas increases your chance of qualifying and getting approved at all three stages: prequalification, underwriting, and closing. 

Create Good Credit Habits

After you repair your poor credit or qualify for a home loan with low credit, it's important to create good credit habits going forward. Qualifying for a mortgage is just the first step! With a home loan, your lender trusts that you'll pay monthly mortgage payments on time.

Owning a house comes with plenty of financial responsibility, but it's also rewarding! Choose a home within your budget and plan future expenses for the full cost of homeownership, including moving costs, renovations, new furniture, and utilities that could be higher than when living in an apartment. Defaulting on your mortgage can lead to foreclosure and challenges if you ever try to apply for another FHA loan or conventional loan down the road.

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Don't Let Bad Credit Keep You From Homeownership

If your minimum score is too low for an FHA loan, you may still qualify for conventional loans with a low down payment through specific assistance programs. While we never recommend taking on more debt on top of a bad credit problem, sometimes a low credit score happens due to things out of your control and shouldn't keep you from owning a home. 

Contact Texas United Mortgage to find out more about your mortgage options. We're an FHA-approved lender, and we love helping buyers have a better financing experience!

Make sure you have a thorough budget when buying a home! Click to download our free "The Definitive Home Buying Cost Worksheet."


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