Buying a house with bad credit can be challenging, especially for vacation and short-term rental investors. Your credit score plays a significant role in the home-buying process. A low credit score can affect your mortgage options, interest rates, and the total cost of the loan. However, with good information and strategies, you can still purchase a house with bad credit.
At The Short-Term Shop, we've helped investors from across the map invest in prime short-term rental markets. and are happy to connect you with the perfect mortgage lender, regardless of your credit report.
Want to know how to buy a home with bad credit?
With offices from Arizona to The Outer Banks, we'll help you buy a house with bad credit in the best markets in the country, no matter what! Our cutting-edge data and market insights make us a leader in rental property acquisitions.
Need help getting that dream property?
Here's how you can find the right mortgage lender, obtain a home loan, and configure your monthly mortgage payment schedule, despite a bad credit history.
Understanding the Minimum Credit Score Requirements
The first step in buying a house with bad credit is understanding different mortgage programs' credit score requirements. Your score reflects your ability to repay debts on time. It is calculated based on factors like your monthly payment history, credit utilization ratio, length of credit history, new credit accounts, and credit mix.
According to Experian, a credit score of 670 or higher is considered good, while a score of 580 or lower is considered poor. The median credit score in the United States is roughly 710, which is considered strong. Most lenders assess credit scores very closely, imposing minimum credit score criteria.
For example, the Federal Housing Administration (FHA) requires a minimum credit score of 580 to qualify for FHA loans with a 3.5% down payment. Meanwhile, some conventional mortgage lenders may have credit score minimums of 620 or higher, depending on the deposit amounts. VA and USDA loans also have minimum credit score, typically ranging from 580 to 640.
Improving Your Credit Scores
Check for credit reporting errors: Over a third of credit reports have errors that can lead to low credit scores, exacerbate poor credit, and make it nearly impossible to buy a house. You can get free credit reports from all three major credit bureaus every year. Check your free credit report to see if your bad credit score is due to errors and inaccuracies!
Pay Your Bills on Time: Late payments can significantly impact your credit score. Set up automatic payments or reminders to ensure your bills get paid on time and that you're in good standing with credit card companies.
Reduce Your Debt: High debt balances can negatively affect your credit score, so try to pay off your debts or make regular payments to reduce your balances.
Minimize Your Credit Utilization: This critical ratio refers to the amount of credit you use relative to your overall limit. Try to reduce your utilization ratio to below 30% at all times.
Keep Credit Accounts Open: When you close a credit account, you can negatively affect your credit score, as it reduces accessible credit and shortens your credit history.
Apply for Credit Sparingly: Applying for too much credit can negatively affect your credit score, so only apply for more when you really need it.
Improving your credit score is critical to buying a property as a short-term rental investor. By paying on time, minimizing debt, checking credit reports, reducing credit utilization, keeping credit accounts open, and applying for credit sparingly, you can take control of your credit score and improve your chances of securing financing on favorable terms.
Exploring Loan Options
Several loan options are available for buyers with lower credit scores. FHA loans and VA loans are popular options for homebuyers with bad credit because they have lower credit score requirements and more lenient down payment requirements. USDA mortgages also have flexible credit requirements and may allow you to buy a house with bad credit and a minimum deposit.
And if you're absolutely strapped for cash, you can even learn how to buy rental property with no money.
Conventional Loan vs. FHA Loan
Although conventional mortgage loans typically require a higher credit score than FHA loans, it's still worth exploring this option if you have bad credit. Many lenders offer conventional loans with credit scores as low as 620, so you may get a better interest rate than you would with FHA loans. Remember that these conventional loans usually require a larger deposit, and you may need to pay for Private Mortgage Insurance (PMI) if your deposit is less than 20% of the home's value.
Nonetheless, a conventional loan may make sense if you can afford the minimum down payment.
Explore VA Loans
You may qualify for a VA loan if you're a veteran or active-duty service member. VA mortgages are backed by the Department of Veterans Affairs (VA) and disbursed to eligible veterans, those on active duty, and spouses of the deceased. The VA loan program doesn't require a minimum credit score, and you may be able to get a loan with no down payment. VA mortgages also don't require PMI, which saves you money on your monthly mortgage payment.
Consider USDA Loans
These loans assist low-to-moderate-income borrowers who live in rural areas. USDA mortgages have a minimum credit score requirement of 640 and don't require a deposit. However, USDA mortgages do have income limits, and the home you're purchasing must meet specific property requirements.
In many cases, the ability to buy a house with bad credit hinges on the lender.
At The Short-Term Shop, our agents understand the nuances and variations of the mortgage application. If you need a bad credit home loan, we can help you find an appropriate lender.
Shop Around for Mortgage Lenders
When you're trying to figure out how to buy a home with bad credit, shop around for mortgage lenders. Not all lenders have stringent credit requirements. Some may be more willing to work with you than others. Be prepared to provide documentation that shows you're a responsible borrower, such as proof of income and payment history for bills and other loans.
How to Find the Perfect Lender for You
Look for a lender with competitive rates and low fees. The interest rate you receive can make a big difference in the loan amount you'll pay over the life of that loan, so be sure to compare rates from multiple mortgage lenders. Ensure the lender offers a variety of loan options to suit your needs, including loan amount terms, down payment requirements, and more.
Whether you seek a conventional mortgage, an FHA loan, a VA mortgage, or some wholly unique loan product, you want a savvy mortgage broker. A lender that uses up-to-date technology can make the mortgage process faster and more efficient, which can be especially important for time-sensitive transactions like short-term rental investments.
Finally, always look for a loan servicer that offers pre-approval. A lender providing pre-approval options can give you a better idea of how much you can afford to borrow and can make the entire process smoother and faster.
Seeking Financial Assistance Programs
There are several financial assistance programs available for prospective homeowners with bad credit. These programs assist individuals who may not have the financial means to purchase a home due to their credit history. Here are some of the monthly payment assistance programs available:
Federal Housing Administration (FHA) Mortgage Programs
The Federal Housing Administration (FHA) loan program offers several products for individuals with bad credit. These programs include:
- FHA 203(k) Rehabilitation Loans: So-called rehabilitation loans help individuals purchase and renovate a home that requires repairs.
- FHA Title 1 Loans: These title loans target individuals who want to make home improvements and repairs.
- FHA Energy Efficient Mortgages: These loans help individuals make energy-efficient improvements to their homes.
Veterans Affairs (VA) Loan Programs
The Department of Veterans Affairs (VA) offers several mortgage programs for military members and veterans. These offerings encompass:
- VA Home Loans: These loans specifically help military members and veterans purchase a home.
- Native American Direct Loan (NADL) Program: This loan program assists Native American veterans in purchasing, building, or improving a home on federal trust land.
- VA Interest Rate Reduction Refinance Loan (IRRRL): This loan program helps military members and veterans refinance their existing VA home loan to a lower interest rate.
United States Department of Agriculture (USDA) Loan Programs
The United States Department of Agriculture (USDA) offers several programs for individuals living in rural areas. These mortgages cover the following:
- USDA Single-Family Housing Direct Home Loans: Single-family housing direct loans help individuals purchase or improve homes in rural areas.
- USDA Single-Family Housing Guaranteed Loans: The guaranteed single-family housing loans are designed to help individuals purchase homes in rural areas too. However, these loans are funded by private lenders and then backed by the USDA.
State and Local Programs
Many states and local governments offer payment assistance for individuals with bad credit. These programs may comprise:
- Down Payment Assistance Programs: These provide financial assistance to help individuals cover the deposit and closing costs of purchasing a home.
- Mortgage Credit Certificate (MCC) Programs: They provide a tax credit to individuals who qualify for a mortgage loan.
- Homebuyer Education Programs: These programs provide education and counseling to help individuals prepare for buying a house.
- Housing Finance Agency (HFA) Programs: HFA programs offer various payment assistance options. Offerings consist of down payment assistance, closing cost assistance, and low-interest rate mortgages.
Private Lender Programs
Some private lenders offer financial aid for individuals with bad credit. These programs may include:
- No Down Payment Mortgages: These mortgages allow individuals to purchase a home without an initial payment.
- Personal Loans: These loans can cover the prepayment and closing costs associated with purchasing a home.
- Lower Interest Rate Mortgages: Some lenders may offer lower interest rate mortgages to individuals with bad credit.
In conclusion, multiple assistance programs are available for individuals with bad credit seeking to purchase a home. These programs can provide financial assistance, tax credits, and education to help individuals prepare for buying a home.
If you still fail to purchase a home, don't lose hope! Learn how to start an Airbnb business without owning a house.
Saving for a Larger Down Payment
Buying a home with bad credit is challenging, but saving for a larger deposit can increase your chances of getting approved for a mortgage loan. Not to mention, you can reduce interest rates and mortgage insurance.
To position yourself for a larger deposit despite a poor credit report, save money prudently. Determine how much you can put away each month, allocate funds toward your savings goal, and use online tools to track your progress.
Wish you knew how to buy a home with bad credit easily?
Honestly, there's no magic answer - but that doesn't mean you can't do it! If you struggle to increase your income at your job or with a side hustle, try to cut back on unnecessary expenses such as dining out or subscription services. Also, do your best to lower your utility bills by conserving energy. If you can, utilize those assistance programs offered by your state or city.
Don't lose faith. Keep your goal in mind and stay motivated. Reassess your budget and savings plan repeatedly as you refine your goals, build your savings and slowly improve your credit report. Before you know it, you'll have your investment property and learn how to start a rental property business!
The agents of The Short-Term Shop are happy to assist.
Why Purchase a Short-Term Rental Investment Property?
You might be asking yourself, is it worth it?
Investing in a short-term rental property can be a wise financial decision to generate passive income while building long-term wealth.
Here are some reasons why investing in a short-term rental property can be a good choice:
High Rental Income Potential
Short-term rentals can provide higher rental income than long-term rentals or traditional investments such as stocks or bonds. According to AirDNA, the average daily rate for an Airbnb rental in the United States was $160 in 2021. So, if your property remains occupied for 20 days out of the month, you can earn $3,200 each month in rental income.
Diversification of Your Investment Portfolio
Investing in a short-term rental property diversifies your investment portfolio and reduces overall risk. Real estate values tend to appreciate over time, which can provide a hedge against inflation and protect your wealth.
Flexibility and Control
As a short-term rental property owner, you have control over your investment and the flexibility to manage your property how you want. You can choose the type of property you want to invest in, set your rental rates, and choose your guests.
Owning a short-term rental property comes with tax benefits such as deductions for mortgage interest, property taxes, and repairs. Additionally, you can depreciate the property value over time which can reduce your taxable income.
Growing Market Demand
The short-term rental market has been exploding in recent years and continues to grow. According to Statista, the global vacation rental market is projected to reach $87.09 billion by 2027, with a compound annual growth rate of 4.4% from 2020 to 2027.
Clearly, there are many reasons to sign that mortgage application, go the distance, and pursue the best bad credit home loans you can. Never let a bad credit mortgage discourage you from investing in short-term rentals. With minimum credit scores and deposit amounts, you can still buy a house - sometimes, with a no-down-payment mortgage!
Purchase Your Short-Term Rental Investment Property Starting TODAY
Don't let a low credit score cost you a great opportunity. When you're worried about the minimum credit score needed, steep interest rates, frightening purchase prices, and stringent mortgage requirements, you have help.
Are you stressed about your credit score, income, and debt-to-income ratio? Don't fear mortgage lenders!
At The Short-Term Shop, our boots-on-the-ground connections and seasoned rental acquisition agents understand the hottest markets in the country. More importantly, we have real-time market data, local trends, and property information indispensable to successful investments.
Buy a house with confidence and ease. Get the interest rates you want for the mortgage amount that makes financial sense. Put your financial past behind you and start building wealth that lasts.
Begin creating reliable, lucrative passive income from your vacation rental, starting today. Link up with a top short-term agent now.