You have the cash and reserves to buy a house, but your credit is bad. Or maybe you don’t have cash or credit, but you really want to buy a house. You will have your work cut out for you, as it is not as easy road to buying a house with bad credit regardless of how much cash you may have in the bank. 

The average credit score in the United States is between 673 and 695.  A good credit is a score of at least 700. However, many Americans have a score of less than 600 which is generally too low to obtain a mortgage loan. Even if you are able to qualify for a mortgage with a low credit score, you will be subject to higher interest rates, insurance premiums and the lender will require a larger down payment.  Seems fair, right?

So, are you out of luck? 

Not necessarily.  There are ways to get financing with bad credit, but there will be some extra steps you need to take if you are trying to invest in real estate with bad credit. 

Why Do You Have Bad Credit?

It is important to determine what is causing your bad credit. First, let’s look at how credit scores are categorized. What is bad credit? FICO defines credit ranges as follows:

Poor: 579 and lower

Fair: 580-669

Good: 670-739

Very Good: 740- 799

Exceptional: 800+

Before we get into strategies on how to buy property with bad credit, you need to look into why you have bad credit and see if you can change that behavior. Bad credit happens for many reasons, some may be out of your control.  If you lost a job or had unexpected medical bills which caused you to fall behind on other payments, you credit score suffers.  But sometimes credit scores are bad because you could use some help with budgeting. Buying more than you can afford each month adds up quick! Taking out a car loan on a car that is way too expensive for you or charging trips and nice clothes on credit cards hurt your credit score in a big way. If that is you, truth is, you need to change your behavior before you become a real estate investor. 

Studies have shown that if everyone’s debt were to be completely wiped out and all credit scores were raised to 800, within three years, the same people who have bad credit today would again fall in the bad credit category with substantial debt again. We are never taught how to budget, it is something we are just expected to know how to do.  But, living within your means is hard. There are so many distracting, shiny objects which are pulling us away from reaching our financial goals.  If you can afford those shiny objects, that’s great! But, if you are buying them anyway and struggling  to pay minimum payments, you will never get ahead.  You will always struggle. It’s dangerous and stressful not being able to cover an unexpected emergency because you have no savings and all your credit cards are maxed out.  You need to start prioritizing what you need and what you want. Maybe sell some of your belongings to pay off debt.  Make a commitment to yourself to save money and increase your credit score.  You can do it!

What Score Do I Need to Qualify for a Mortgage?

Different loans have different credit score requirements. For the best possible rates and terms, you should have a score over 700, however a score of 620 or above will help you qualify for a traditional fixed-rate mortgage.  Here are some of the loan types and the minimum credit score they require:

FHA loans:  580 if you want to take advantage of a 3.5% down payment amount.  In some cases a score lower than 580 will be accepted but may require 10% down.

VA Loans: Between 580-620 depending on other factors like your debt to income ratio,

USDA Loans: 580-640

Of course, these loans come with more than just a credit score requirement.  You also have to have cash reserves and debt to income ratios within a certain percentage.  Typically if you have one, you will have the other.  Again, it is all about your spending behavior. 

Now that you’ve been lectured on your spending habits, let’s talk about how to buy a house with bad credit. 

Get an Investment Partner

Where you have strengths, someone else will have weakness and vice versa.  If you can find a partner who also wants to invest in real estate, that is a great way to overcome your bad credit.  This partner would need to have the credit score to get you into a loan and then you will have to bring something else to the table.  Maybe you’ll manage the tenants or make all home repairs. 

When forming a partnership, you need to be careful.  I don’t care if your partner is your best friend since the second grade, you need to have a legal agreement on who is responsible for what and how earnings will be split.  You also need to be sure you are both on the same page when it comes to long term strategy and goals.  If you can find a partner you can trust and who trusts you, go find that property. 

Find a Hard Money Lender

This may be a risky move, but you could look for a hard money lender to help you finance your investment property. Your credit score is rarely checked when getting a hard money loan. Hard money lenders are lenders or businesses who lend money with short terms and high interest rates. Rates vary, but they are usually between 10% and 18% interest with less than two-year terms. Hard money lenders also charge high fees which can add another 3% to 10% to the loan amount. 

This sounds scary, right? Why would someone take such a risky loan? Typiclly those looking to flip homes will take out this type of loan. The goal of flipping is to get in and out as quickly as possible which makes a hard money loan make sense. 

Seller Financing

Seller financing is just what it sounds like, the seller finances the property.  Instead of you taking on a new mortgage loan, the seller agrees to let you take over their payments until the property is paid off.  This can really work in your favor. If the seller is someone you know, they probably won’t care about your bad credit. 

The best seller financed deals are when the sellers owns the home free and clear and no longer has a mortgage on it.  That way you will not have to worry about lenders coming after you or the seller for breaking some clause that’s hidden in the mortgage documents and the seller may even agree to lower payments. 

Private Money Lenders

Private lenders are similar to hard money lenders.  Private lenders are lenders who are trying to diversify their cash into other investments. They usually do not belong to some company, they can be someone you know like a friend, family member or neighbor. 

Since the lender is someone you know, they probably will not ask to verify your credit score or income, but it is best to be upfront with them.  You don’t want to mislead a person who is generously lending you money when nobody else will.  You also don’t want to borrow money from someone who you know can’t afford to lose it. Investing in real estate is a risk, and so is lending money to someone with bad credit, so if you go this route you need to make sure you will do everything you can to ensure the lender is paid on time every month. 

Consider Wholesaling

Wholesaling has become a popular method for real estate investing with bad credit. If you are a bargain shopper, this may be right up your alley.  Wholesaling requires finding really good deals, putting them under contract and then “flipping” them to another buyer for a higher amount. It is possible to do this without ever having to use any of your own money or having your credit checked. If this sounds too good to be true, just know that there are some risks. First off, wholesaling is hard work.  This is not a passive real estate investment strategy.  You will be out there hustling to find a buyer for your property.  Having a network of investors and buyers will be a necessity to make this work.  It also requires a lot of patience.  You will need to talk to sellers, estimate repair costs to entice an investor to buy the property, find a buyer and then make sure the deal goes through.  If you go this route, you will probably need to get a real estate license and become very well versed in the market and real estate procedures. 

Maybe You Should Improve Your Credit Instead

If these real estate investment strategies sound confusing or like too much work, maybe your best bet would be to improve your credit score and buy a house the traditional way.  The good news is , credit scores can be increased relatively quickly but it does take a lot of discipline.  

Even if you are confident you can take advantage of one of the investment strategies above, you should still fix your credit because eventually you will need something that requires a credit check.  Plus if you put in the work to improve your score, chances are you will save up money and improve your budgeting skills. It’s really a win-win situation.

So, how can you improve your credit score? Here are a few idea:

• Make more money: Easier said than done, right? But if you can pick up some extra shifts or find another part-time way to make money it will help you pay off your debt quickly. 
• Pay everything on time: Pay every bill on time each month no matter what. If you are following tip number one, make more money, this should not be a problem.
• Lower your balances: Having a balance under 30% of the credit line will improve your score.  Do everything you can to get you balance below that point. 
• Don’t apply for new credit: Applying for a credit card, mortgage, car loan or any other type of loan hurts your credit.  Plus, if you are trying to pay down credit you don’t want to be taking out any new lines of credit anyway. 

Repairing your credit will take time and hard work, there’s not denying it.  You could also talk to a mortgage lender to let them know you have bad credit but you want to improve it so you can buy a house.  They should be able to get a detailed plan together of what you need to do to optimize your score. 

Final Thoughts

Even though you can buy a house with bad credit, does not mean you should.  What will help you more than anything else when it comes to long term financial success is getting your spending under control.  Only buy things you can afford to pay with in cash. There are plenty of books you and even free online seminars you can attend on getting your debt under control and paid off, I would advise checking those out too. 

If you are absolutely set on buying a home today with bad credit, it will also take work.  You will need to build and maintain relationships with people who are willing to take a chance by lending you the money you need. 

Whatever you decide to do, just know that the current real estate market is hot! Investing is a great idea and I hope you are able to work out a deal that will benefit you for years to come.