Is There Such a Thing as a First-Time Homebuyer with Bad Credit? (Spoiler: Yes!)

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, including first-time homebuyers, move-up borrowers, and retirees — with as little as 3% down.

Let’s translate that into some real numbers. The latest report from the National Association of Realtors (NAR) shows that the median home price is $396,900. A 3% down payment would be $11,907.

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 borrowers on the mortgage can’t include their income. With this loan, income is limited to 80% of the area median.

If you have… a credit score of 580 or less and no down payment

If you’ve served in the military, you may be eligible for a Veterans Affairs (VA) loan. 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.

This loan doesn’t require private mortgage insurance (PMI), offering the borrower major monthly savings on the cost of that insurance alone.

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 $39,690 for a $396,900 home — 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, which can range from 0.15% to 0.75% of the loan amount each year.

However, your mortgage insurance payment may be canceled after you gain a certain amount of equity, usually 20%. It cancels automatically after that equity reaches 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 when your property has gained sufficient equity or unless you put at least a 10% down payment.

If you have… a credit score of 620, 3% down, and do not exceed area income limits

The Fannie Mae HomeReady loan is designed for lower-income borrowers earning 80% or less of the area median income. It’s a great option for first-time or repeat homebuyers, those with limited cash for a down payment, or buyers relying on boarder or rental income to qualify.

With a down payment as low as 3% — just $11,907 for a $396,900 median-priced home — this program makes homeownership more accessible. A credit score of 620 is the minimum requirement, but if you have 680 or higher, you may qualify for better loan terms and lower rates.

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 the 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 your income is below 80% of the average median income, as set by Freddie Mac, you may be able to secure a Freddie Mac Home Possible mortgage. It would allow you to buy a $396,900 home with just $11,907 down.

You may even be able to qualify with a lower or no credit score if you have a higher 5% down payment of $19,845, 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 area’s median salary.

How to find bad-credit-friendly mortgage lenders

Not all lenders are created equal, especially when it comes to working with bad credit. Here are some tips to help you find the right one:

• Check with government-backed loan programs: As shown above, FHA, VA, and USDA loans often have more lenient credit requirements than conventional loans. If you qualify, these programs can open doors to better rates and lower down payments. Start by checking the official websites or speaking with approved lenders.
• Look for local credit unions and community banks: These institutions tend to be more flexible with lending criteria than big banks. They may offer special programs for first-time buyers or those with bad credit. It’s worth setting up an appointment to discuss your options.
• Partner with a mortgage broker: Brokers have access to multiple lenders and can help you find one that fits your financial situation. They know which lenders are more forgiving when it comes to bad credit. Just be sure to ask about any broker fees before proceeding.

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 have inadequate credit—or no credit at all—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 start 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 homebuying 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.”

A proven local real estate agent can connect you with mortgage lenders and help you navigate financing options. Partner with an agent today to secure your dream home.

Header Image Source: (Ingrid Martinussen / Unsplash)