Credit missteps diminish your credit and your options for financing a home purchase, but there are programs available through the government to help you buy a home if your credit isn't good. Government backing allows private lenders to finance riskier borrowers because the government promises to cover lenders' losses if borrowers default. To obtain such financing, you must meet specific income and asset requirements, and the property you're purchasing must meet lender standards for collateral.
What Is Bad Credit?
Mortgage lenders use your credit score to determine loan eligibility. They choose the middle of three scores provided by the three main consumer credit reporting agencies, or bureaus: Experian, Equifax and TransUnion. The credit scores used by the agencies are called FICO scores, which range between 300 and 850, and lenders generally consider a score in the low 600s a bad score. A bad individual credit score affects loan eligibility and the loan's interest rate, and may impact a government program's down payment requirement. In the case of co-borrowers, the lender bases it decisions on the weaker borrower's credit.
A Variety of Government-Backed Loans
Government-guaranteed loans have helped borrowers with less-than-perfect credit obtain affordable home financing for many decades. The Federal Housing Administration -- the predecessor to the Department of Housing and Urban Development, and now part of that department -- established a mortgage insurance program to help borrowers after the Great Depression. The Department of Veterans Affairs guarantees loans for veterans, active-duty military, and certain surviving spouses of veterans. VA loan candidates must meet specific requirements for length and type of service. The Department of Agriculture finances loans for rural housing or homes designated as "outside a major metropolitan area," according to USDALoans.com.
Varying Credit Standards
The FHA, VA and USDA have distinct credit guidelines. For example, the FHA requires a 580 score for its minimum down payment requirement of 3.5 percent, and borrowers with scores between 500 and 579 must put down 10 percent. VA and USDA loans have no minimum down payment requirement, regardless of credit scores. The lenders may set stricter credit score standards than the government agency backing their loans. For example, as of 2013, most USDA and FHA lenders require a minimum 640 score, and VA lenders typically require at least a 620 score.
All in The Past
Despite their willingness to finance you with bad credit, FHA, VA and USDA lenders verify that your credit mishaps are history. In addition to making you wait one to three years after a bankruptcy or foreclosure before applying, lenders ensure that you have recovered from financial hardship. You must provide written explanations for derogatory accounts and demonstrate the ability to cover a new housing payment. Compensating factors for bad credit include substantial cash reserves, debt payoffs, and an overall ability to manage your finances, as determined by the loan underwriter.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.