The entire home buying process is confusing and overwhelming, but it is possible to secure a home loan with low credit. Bad credit is like a dark raincloud over any significant purchases that go beyond paying cash, so it’s essential to understand how to read a credit report, find ways to improve scores quickly, and how to qualify for a loan.

Loan Factors

A sizable down payment is usually the easiest way to buy a home with a low credit score, but it’s not realistic for most people to put down a significant sum of money. Lenders will consider a few factors to determine if an applicant meets their standards for a favorable borrower. They want to know annual income, debt-to-income, cash available for a down payment, and history of fees with other lenders.

Credit Report and Score

It’s not uncommon for people to assume their credit report is reasonably accurate, especially with a history of delinquent payments or charge-offs. Request a free copy to get an idea of the negative marks causing such a low score. Dispute any accounts or charges that do not look familiar, and start working on paying down balances on legitimate charges. Bankruptcy, outstanding collections, and too many hard inquiries will make a person seem unreliable and unfavorable for a home loan. It’s possible to pay for deletions of negative accounts, but always get the agreement in writing to ensure that the lender keeps up their end of the deal.

Lending Options

The two main ways to get a home loan are to go through a conventional lender or one backed by the federal government. Generally speaking, the government loans will be easier for people who would be considered high-risk. Their requirements are usually more lenient in overall credit score, down payment, and debt-to-income requirements. A conventional lender will either shy away from borrowers with a score below 620, or they will ask for a sizable down payment.

Through the Federal Housing Administration (FHA), loans are available to first-time buyers with a minimum score of around 580. The Department of Veteran Affairs (VA) requires a score of about 620 for service members that are retired or considered active-duty. Homes in qualifying rural areas can be purchased with a USDA loan with a score of 640.