One of the most common questions people ask real estate agents is, “What credit score do you need to buy a home?”
It’s a great question. While ValuePenguin.com reports that the average credit score in the US is currently 711, and those numbers are steadily rising year over year. That’s a good credit score to buy a home! But according to BadCredit.org, 34% of Americans have a credit score of less than 600. That means a large proportion of people can’t get a mortgage, making buying a home or investing in real estate a difficult task.
So, can you buy a house with bad credit? Well, there is good news and there is bad news:
- The good news is, YES, you can invest your money in real estate with bad credit (explained later in this post).
- The bad news is: you probably shouldn’t. Unless… well, more on that later. But first…
Are you ready to invest?
One of the most frequently asked questions in the Pyjama People forums is, “How can I start investing in real estate with no money and bad credit?” The answer? You should not. You need to resolve your situation and invest from a financial position.
Eligibility for a traditional home loan
If you’re looking for a traditional fixed-rate mortgage, you’ll likely need a FICO score of 620+. Still, there are other loan options that allow you to buy a home with a lower credit score or with less money. Among which:
- FHA Loans: 580+ credit score qualifies for 3.5% down (lower than 580 may require 10% down)
- VA loans: Most lenders want 580-620 . see
- USDA Loans: Most lenders want 580-640 . see
- Fannie Mae HomeReady: (for low and middle income borrowers) 620+ can qualify for 3% down
How Lenders Define Credit Ranges
While there are multiple methods of scoring credit, FICO defines credit ranges as follows:
- Arm: 579 and below
- Fair: 580-669
- Good: 670-739
- whole good: 740-799
- Out of the ordinary: 800+
The truth is that the credit score is just a number that represents your financial ability to manage your money. If you fall into the poor or reasonable range, you may need to do extra work to prove you’re worthy of a home loan. Working on improving your credit is your best option.
6 Ways to Improve Your Credit Score to Buy a Home
Bank loans may be hard to get, but it’s hard to beat the low interest rates and long terms that a bank can offer. You may not need it today, but once you choose to invest in real estate on a larger scale, you’ll wish you had a lot of credit.
There are a billion articles on how to improve your credit score, so there’s no need to go into too much detail here. But the following tips should help:
- Bet on solving your debt problem. This won’t be easy. Are you willing to do what it takes?
- Start earning more income. Yes, that means you might have to put in some extra hours at work or find other ways to get busy. You must keep all outstanding debts current and pay off what you can.
- Lower your balance. Make sure the balance on all your revolving debts is less than 30% of the limit. High debt-to-limit ratios make your credit worse.
- Stop applying for credit. Seriously, stop. It hurts your score.
- Pay everything on time, no matter what. It shouldn’t matter if your child is sick and your leg falls off on the way to the hospital. You must pay every bill on time.
- Consider purchasing a secured credit card. Once your debts are current or paid off, consider purchasing a secured credit card. A secured credit card has a maximum limit of whatever dollar amount you deposit with the lender. In other words, you give the bank $500 and they give you a $500 credit card. Use this to buy your gas, groceries, and a few other things – and PAY IT OFF IN FULL EVERY MONTH. This is your way to build trust with the credit world.
Restoring your credit takes time. There is no doubt about it. But if you are committed to the process, it can be done. Soon bad credit will be just a memory.
How to buy a house with bad credit?
If you still want to buy a home or invest in real estate, here are five ways you can do it with not-so-great credit.
1. Try a Partnership
Partnerships are one of the best ways to invest in real estate because everyone has something they lack. Partnerships help fill that void. For you, it may be your bad name, but you may have something that your potential partner doesn’t. Time? Skills? Busy? What can you bring to the table to help them achieve their goals while you achieve yours?
Of course, you have to be careful when it comes to partnerships. Do your homework, watch your partner carefully, and as with all these tips, only invest in good deals.
2. Consider Seller Financing
Seller financing is the process where the seller agrees to finance the property, rather than letting you get a new loan. Essentially, the seller agrees to let you make monthly payments to them until the property is paid off (or the term of the seller-funded loan expires).
Seller financing can be powerful, as sellers typically don’t ask for a credit score. However, the best use of a seller-funded deal is when the sellers own the property for free and clearly. In other words, they are not allowed to have a mortgage on the property. If they try to “execute the contract” on the house they have an existing loan on, their lender may foreclose because of something known as “the due-on-sale clause.” So look for deals where the owner does not have a mortgage.
Seller financing is likely to become more popular in the coming years as rental property owners in the baby boom sector try to get out of the game but also look for their monthly income. Seller financing offers a great win-win solution for all parties.
3. Look to hard money lenders
Hard money lenders are individuals or companies that lend money at high interest rates and short-term to real estate investors. Hard money rates vary, but typically fall between 10% and 18% interest, with maturities of less than two years (often just six months). In addition, hard money lenders also charge high fees, known as “points,” which can add up between 3% and 10% of the loan amount. Many hard money lenders used to be investors themselves, but have moved to the more passive method of simple lend.
Sounds nice, doesn’t it?
Because of its high rates, high fees, and short terms, hard money is ideal for homeowners and those looking to adopt the BRRRR (buy, rehabilitate, rent, refinance, repeat) real estate method. This way, the real estate investor can get in and out quickly, cash in on the lender, and move on to the next project.
Hard lenders rarely look at the borrower’s credit score, although it is becoming more common. In reality, the lender cares most about the security in the deal. They want to know that no matter what happens, they will make money. If the borrower defaults, can they seize the property and sell for more?
If you have a low credit score but want to flip houses, hard money can be a good option. Just make sure you find an incredible deal so the lender feels safe, then shake that flip and make your money.
4. Discover private lenders
As with hard money, private lenders are individuals you may know who are looking for a good return on their investment. Unlike hard money lenders, private lenders are not typically real estate professionals who lend money to a business. They want to diversify their money into other investments. Private lenders could be your dentist, mom, neighbor, or anyone you’ve built a relationship with on Pyjama People.
The keyword with private money is relationship.
If you’re handling other people’s money, it’s unlikely they’ll ask for your credit score. However, this means that you have to work even harder to make sure they get the kind of return on investment they want.
This is when the discussion about credit score rather a symptom comes into play. Don’t abuse Grandma’s kindness and lose all her money. In fact, never take money from someone who couldn’t afford to lose it. That would make for an awkward Thanksgiving dinner.
5. View wholesale
Wholesale is finding great deals, putting them under contract and quickly ‘turning’ them over to a cash buyer for a higher amount. Many wholesalers do this whole process without using a single dollar of their own money or ever having their credit checked.
This probably sounds great to you, but before you head out the door in search of a great deal, understand a few things:
- Wholesale is a profession. It’s NOT passive, and if you don’t work, you don’t get paid! Most would say that wholesale isn’t even investing because you aren’t actually buying or selling the property.
- Wholesale is difficult. It requires time, patience and great marketing skills. You also need to be able to talk to sellers on the phone, market yourself as a credible solution to their problems, estimate rehab costs, find cash buyers, and put it all together without it all falling apart. In other words, wholesalers have to be good at all over the real estate investing world. It is not an easy task and most people who try to wholesale never do a single deal.
- There are legal implications regarding wholesale and the need for a real estate license. Simply put, you should probably get your license.
A low credit score doesn’t mean you can’t buy a house or invest in real estate. It just means you need different strategies. And you should also carefully consider whether buying real estate is the right solution for you right now.
More about Pyjama People credit scores