Does Credit Matter when Buying a House?

When bad credit gets in the way of approval to buy a house, it gets you down and leaves you feeling stuck or frustrated. Debt can be challenging to manage and once it affects your credit score, it takes time before you can improve your ratings and your financial standing.


For many of us, we might not want to wait that long before we enter the property market, but the question is, can you buy a house with bad credit?


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Don't let credit stop you from achieving your goals of home ownership

In this blog, we look at the steps you can take and what you need to know to get into the real estate market, despite your credit history.


Can You Buy a House with Bad Credit?


Purchasing a home is a monumental financial undertaking. Even if you have good credit, applying for a mortgage can be a tedious process but it’s a lot more challenging when your credit is negative.


Infographic about credit history and applying for a home loan
Infographic - The influence of credit on buying a house


The truth is that you can buy a property with bad credit, but you need to prove affordability and that you are on top of your bills and have no outstanding payments or collections. This includes debt management steps you’ve been taking to improve your credit. You can’t continue to rely on your credit or rising bill payments if you want to invest in property.


Let’s start by looking at what is considered a negative credit rating and the steps you can take to get into the property market.

What is Negative or Bad Credit?


When you’re told that you have a bad or negative credit score it means that your credit report shows negative financial and debt-related behaviors. When you don’t repay your debts according to the terms of a loan or bill repayment plan. The following behaviors will affect your credit report:

  • Missed or late payments

  • Foreclosure

  • Debts going into collections


Credit scores (also known as FICO scores) typically range from 300 to 850. Scores between 300 and 579 are considered poor.


The credit score is important because it affects different financial pursuits from taking on a personal loan and buying a car to getting approved for an apartment or home loan.

You can find your credit score when you request a credit report through a reputable financial provider.


Top sources for requesting a free credit report include:

You can also visit federal government websites such as FTC Consumer Information to get a free credit report.


Once you know your score, you’re in a better position to prepare for your mortgage application rather than be surprised by a rejection. If you have a score that is below 500, it is better to work on improving your financial background prior to applying for the home loan. Banks generally don’t issue loans for scores below 479 and 500.



Steps to Getting Approved for a Mortgage with Bad Credit


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It might take some work but you'll eventually get there

Once you’re ready to apply for a home loan, the good news is that assessments are individualized so even if you are applying with a negative rating, no two credit scores and reports are the same. There are various factors that could influence the reason for your negative or bad credit including a few late payments compared to someone else who might have undergone a foreclosure.


Banks will look at the following factors when considering a mortgage:


  • The amount available for a down payment

  • The borrower’s income (or combined income if a couple is applying)

  • The borrower’s total debt


The best way to secure a mortgage is to offer a sizable down payment on a property. The more you have as a down payment, the better your chances of getting a home loan because banks view cash quite favorably and will only issue a certain amount for the home loan based on your score.


If you don’t need a full mortgage, a large deposit can work in your favor too. Be prepared for higher interest rates though. Mortgages that are approved with bad credit will be issued a higher interest compared to those with a positive credit history.


Focus on Improving Your Credit


Lenders want to see that you’ll be able to afford the loan they issue. They won’t approve a mortgage unless they see improvements in your financial practices. If you try to reduce your debt or show lenders and credit providers how you are repaying late bills, it puts you in better standing than if you applied without any effort to decrease your debt. You can also check out 10 Steps to Financial Stability for tips on money management.



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Look at your credit as opening endless possibilities

Don’t hide from your debt...


If accounts are left unpaid, it simply makes things harder when you want to pursue a loan or personal finance. Your finances could also affect your ability to rent let alone take on a mortgage!


If you aren’t sure how to address outstanding debt, it is best to speak to a financial advisor. They can assess your debts and income and advise on a plan to help you reduce those bills and improve that score.


Think About an FHA Loan


For first-time homeowners, there is the option of an FHA loan which is offered by the federal government. It is a popular choice because it offers lower qualifying criteria, and you only need a credit score of 500.


Traditional Loans for Housing


If you have a good income and you can afford the monthly repayments on your desired mortgage, then it becomes easier to apply for a loan to buy a house.


If you apply for a traditional home loan, you will need a credit score of above 620 along with qualifying criteria such as affordability and down payment requirements.


*Tip ~ If you get approved for a mortgage with negative credit and you buy a house, you could have the loan refinanced so you can take advantage of better interest rates.


Consider a Co-Signer


If you cannot get approved for a home loan, you could reach out to a family member to act as a co-signer. Co-signers take on the financial responsibility of the loan and interest if you default on your repayments. This gives the bank peace of mind that they will have someone to afford the loan and settle the repayments if you cannot pay the loan. It is risky for the co-signer too, because they don’t want to tarnish their credit rating either if they are left with your unexpected debt. Think long and hard before you request a co-signer.


Visit More Than One Lender


Different lenders have different requirements. Not all lenders will offer the same loan sum either so before you decide, it is a good idea to see a few providers who will perform their own assessment of your financial history. They will determine if you qualify and for how much.


What if You Can’t Get Approved for a Mortgage with Negative Credit?


Getting approved for a home loan is all about showing how you’re improving your credit and working towards a positive score.


Take the Following Steps To Work on Your Credit Score


Manage Your Credit


The bank offers every applicant a specific amount of credit including the limit on your credit card. The way you utilize this credit will influence your credit score. If you use more credit ad you fail to make repayments on time, it can affect up to 30% of your credit score.


Length of Credit History


The age of your credit account will contribute to your score. It is always better to open one account at an early stage and to pay off small amounts over time to build a positive credit standing.


Paying Your Bills on Time


One of the most important parts of your credit score is maintaining the payments of your bills on time. More than 35% of your credit score relates to paying your bills before it’s due.


Different Types of Credit


It is good to have different forms of credit available. This way your financial provider can assess your repayments across your accounts to determine your spending habits including repayments.


What Else Can You Do to Get Approved?


Resolve Collections


A collection on a credit report means that you have not paid an outstanding debt or bill and you still owe money on it. This is why it is so important to check your credit report. If you have updated your accounts, request that collections on the report be deleted. You won’t be considered for a mortgage if you have a collection on your report.



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Get collections resolved quickly

Avoid Hard Credit Checks


If you are applying for a new account or a type of insurance cover, companies will perform a hard credit check. Unfortunately, hard credit checks can hurt your score and shouldn't be performed around the time you are applying for a home loan.


Can You Own a Home if You Have Bad Credit?


Negative credit shouldn’t get in the way of buying a house but banks will seldom approve a home loan for scores below 500. It means that you’ll have to work on your finances for a little while to improve your score and your repayment history.


If you can improve your score and work on your credit, you place yourself in a better financial position to get approved for a mortgage.


Once you’ve gained control of your debt and you have a decent deposit on a home to purchase, shop around for home loans with the best interest rates. Compare, compare, and compare some more so you find value and affordability.


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Work your way to happiness and a home loan


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