How to buy a house with bad credit

Mortgage lenders look at your credit score to determine your eligibility for most home loans.

That three-digit score is based on details that FICO and VantageScore, the leading credit scoring models, collect including your payment history, the length of time you've had credit and how much of your available credit you're currently tapping.

What's a "good" credit score? That depends on your goal: Are you getting homeowners insurance? Renting an apartment? Taking out a car loan?

To get approved for a mortgage, the much-touted sweet spot is a 620 FICO score or better. But if your score dips below that, don't despair: There are still ways to get a home loan with poor credit.

If you don't have a 620 and can't get approved for a conventional mortgage, government-backed loans should be the first alternative you consider. They have more flexible credit requirements, lower interest rate and down payment requirements. And, in some cases, they don't even require private mortgage insurance.

1. FHA loans

Backed by the Federal Housing Administration, FHA loans are designed for low-credit borrowers: You can get approved with a score as low as 500, if you make a down payment of at least 10%,. If you have a 580 or better, you only need to put 3.5% down.

There are some drawbacks to FHA loans, however:

• They can only be used for primary residences
• The appraisal process can be much stricter than with conventional mortgages.
• An upfront fee of 1.75% of the loan balance is also due at closing.

In addition, If you put less than 20% down on an FHA loan, you'll have to pay an annual mortgage insurance premium for the life of the loan.

If your original LTV is 90% or less, (meaning you made a down payment of at least 10%), you'll pay MIP for 11 years. If your LTV is greater than 90% (i.e., you put less than 10% down), you'll pay MIP through the life of the loan unless you refinance with a conventional mortgage.

Rocket Mortgage is one of the largest FHA lenders in the country and is our top pick for customer service.

Another great option is Chase Bank, which has more than 4,000 locations nationwide for in-person service.

2. USDA loans and VA loans

Neither the U.S. Department of Veterans Affairs nor the Department of Agriculture set minimum credit score requirements for USDA loans or VA loans, making them good options for borrowers with less-than-stellar credit who meet fairly specific guidelines.

You may be eligible for a VA loan if you're a current or former member of the military. They don't require a down payment and boast lower-than-average mortgage rates.You're not required to pay for mortgage insurance, either but you do pay a funding fee at closing, which is 1.25% to 3.3% of the loan total.

USDA loans are available for buyers in specific rural and suburban locations throughout the country. There's no minimum down payment but while you won't have to pay mortgage insurance, there is a guarantee fee to secure the loan. It's equal to 1% of the loan amount at closing, plus 0.35% annually, which is usually rolled into your monthly mortgage payment.

Guild Mortgageapproves USDA loans and VA loans for borrowers with credit scores as low as 540.

Non-qualifying mortgages (or non-QM loans) are another option for borrowers with lower credit scores: Non-QM loans don't follow Consumer Finance Protection Bureau guidelines, which means there's more flexibility when it comes to credit history, income criteria and other requirements. They may also offer more of a variety of loan terms and structures.

People who might want to consider a non-QM loan include:

• Borrowers with past credit issues or limited credit history
• Borrowers with a higher amount of debt
• If you have employment gaps or recently started a new profession
• If you have an ITIN but no Social Security Number
• Borrower using assets instead of monthly income to qualify
• Medical professionals
• Self-employed, freelancers or gig workers
• People looking to buy a non-warrantable condo

Some lenders, like Flagstar Bank, also offer non-QMs to borrowers without a credit score — relying on your history of paying rent, utilities and other bills to determine your creditworthiness for a conventional or government-backed loan.

Rate is another non-QM lender that works with borrowers with poor or no credit and, in some states, it offers remote closings

If your credit score is holding you back from homeownership, you could ask a family member or friend to co-sign your mortgage.

A co-signer an insurance policy for the lender: They're responsible for repayment of the loan if you fail to make payments, so there are some significant risks involved:

• The co-signer's credit and ability to take on other debt is impacted, even if everyone pays on time.
• It may cause friction in your relationship, especially if payments are not made on time.
• The co-signer is responsible for repayment, but is not listed on the deed and can't reap the benefits of homeownership.

If other options aren't available, you should pause your home search and focus on improving your credit.

Lenders typically rely on one of the three main credit score bureaus — Experian, Equifax or TransUnion — each of which weighs factors slightly differently. According to a Lending Tree study, though, working on your credit score for a year can raise it more than 100 points. Here are some methods:

• Make on-time payments: Your payment history makes up 35% of your credit score. Making on-time payments, especially more than the minimum will boost your score quickly.
• Pay off debt: Your total debt accounts for 30% of your credit score, so paying it down will help you raise your score a great deal
• Keep credit utilization rate under 10%: Your credit utilization ratio is the amount of revolving credit you're accessing versus your total amount of available credit. Keeping balances on credit cards low will lower your CUR.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage article is based on rigorous reporting by our team of expert writers and editors. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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