How to Buy Real Estate with Poor Credit

Low credit scores can prevent you from qualifying for a conventional mortgage, but with so many alternative financing options, your poor credit doesn’t have to hold you back. 

Let’s look at credit score requirements for home loans and explore legitimate ways to buy real estate with bad credit. 

What Credit Score Do You Need to Buy a House?

Generally, lenders like to see a credit score of at least 620 for a conventional home loan. But 22% of Americans have credit scores under 620, so many lenders allow some wiggle room, based on factors like the down payment amount and the buyer’s income vs. current debts (the debt-to-income ratio or DTI).

What if you can’t qualify for a conventional mortgage based on your credit? 

Don’t give up! There are other options for buying real estate with poor credit. 

Options for Buying Real Estate with Poor Credit

Here are seven different ways to buy property if your credit score is under 620.

FHA Loans

FHA loans are backed by the Federal Housing Administration, which allows lenders to take a greater risk in loaning money to buyers with lower credit. If you have a credit score of at least 580, you might qualify for an FHA loan with a 3.5% down payment. Some lenders will even work with credit scores as low as 500 if you can put 10% down.  

USDA Loans

USDA loans are backed by the United States Department of Agriculture. USDA loans are reserved for low-to-medium-income buyers in rural areas. There are specific criteria that both the property and the buyer need to meet. If you and your property meet the program requirements, you could qualify for a USDA loan with a 580 credit score and a 0% down payment.   

Rent-to-Own

Rent-to-own homes allow you to occupy a property as a renter with the intention of buying the property at the end of the lease term (typically one to three years). This lease period gives you time to improve your credit score so you can qualify for a home loan to purchase the house at the end of the lease. 

Rent-to-own buyers typically pay an upfront option fee, which secures their right to buy the property. They also pay monthly premiums on top of the rent, which are applied toward the cost of the purchase if the deal goes through. However, if the buyer backs out of the deal, the option fee and premiums are typically forfeited to the landlord.   

Seller Financing

In some cases, sellers may be willing to loan you the money to complete the purchase. Then you would make your monthly mortgage payments to them. This works well for sellers who don’t need the proceeds of the sale in a lump sum and are happy to have the passive income plus interest. Seller financing isn’t bound by institutional lending criteria, so they may be willing to work with lower credit scores. Like any mortgage lender, the seller has the option to foreclose on the property if you fail to repay the loan. 

Reputable Co-Signer

A co-signer is someone who agrees to take responsibility for the loan if you default. This can make lenders more willing to work with you despite your lower credit score. Requirements for co-signers are usually more strict, so your co-signer may need exceptional credit and a very low DTI.

All-Cash Deal

Paying all cash isn’t a possibility for everyone (especially first-time buyers), but buyers with a lot of equity in their current home may earn enough from the sale of their current home to pay cash on a smaller home. This allows you to skip the lender and their credit requirements entirely.

Hard Money Loans

Hard money loans are higher-interest loans with shorter terms (typically one to five years), provided by private lenders. You can structure them so that you only pay interest during the loan term, with the principal amount due at the end as a lump sum (called a balloon payment). This type of loan often works best for investment properties like fixer-uppers, which allow you to quickly add value to a property so you can sell it or refinance it before the balloon payment becomes due.    

Before Buying Real Estate with Bad Credit

If you’re looking to purchase a property with poor credit, there are a few steps to take first.

1. Review Your Credit Report

You’re entitled to a free copy of your credit report from all three credit bureaus (Experian, Equifax, and TransUnion) every year. Pull your credit to see your current score and to review the information on your reports for accuracy.

2. Increase Your Credit Score

There are several ways to improve your credit:

• Correct errors on your credit reports. In a recent study, 27% of Americans found a mistake on their reports that was serious enough to affect their creditworthiness. You can dispute inaccurate information for a potential credit boost.

• Pay down debt. Getting your debt below 30% of your available credit limit can improve your credit score since your credit utilization ratio accounts for 30% of your credit score. 

• Ask creditors to increase your credit limit. Increasing your credit limit is another way to improve your credit utilization ratio (as long as you don’t charge more against those accounts). 

• Keep old accounts open. When you pay off a credit card, don’t close the account. You want to keep accounts open to increase your length of credit history, which accounts for 15% of your score. 

• Pay all your bills on time. This will improve your score over time.  

3. Confirm Your Ability to Make Mortgage Payments on Time

Only accept a loan to purchase real estate if you’re sure you can comfortably afford the new mortgage payment, including the property taxes, insurance premiums, and maintenance costs that come with ownership.

How to Find Properties to Purchase with Alternative Financing

Buying real estate with poor credit may require you to look beyond the properties listed for sale in your market. PropertyReach can help you find properties to purchase with alternative financing.

This nationwide real estate database comes with advanced filters to help you find the perfect match. For example, if you’re considering USDA financing, you can limit your search to eligible rural areas. There are even filters for current owners. So if you’re looking for a seller who might consider seller financing, you can filter owners by age and how long they’ve owned the home to find retirees with lots of home equity who may be looking to downsize.

You can even use PropertyReach’s skip-tracing feature to access owner contact information so you can reach out directly. This allows you to contact owners of off-market properties, effectively eliminating competition from other buyers.   

Don’t let poor credit keep you out of the real estate market. Careful planning and leveraging the tools available through PropertyReach to find eligible properties for your creative financing.