Yes, You Can Buy a Home with Imperfect Credit
If your credit score isn't where you'd like it to be, you might think homeownership is out of reach. The good news: Colorado has options for buyers at nearly every credit level. Here's a realistic look at what's possible—and how to improve your position.
Credit Score Reality Check
First, let's understand what lenders see:
- 740+: Excellent – Best rates and terms available
- 700-739: Good – Slightly higher rates, full program access
- 660-699: Fair – Higher rates, most programs available
- 620-659: Below average – Limited conventional options, FHA available
- 580-619: Poor – FHA with 3.5% down, fewer options
- 500-579: Very poor – FHA with 10% down only
- Below 500: Very limited options – focus on credit repair first
Loan Options by Credit Score
Credit Score 620+: Conventional Loans Available
With a 620+ score, you can qualify for conventional loans, though your rate will be higher than borrowers with excellent credit. Expect:
- Rates 0.5% - 1.5% higher than the best rates
- PMI costs higher (possibly 1% - 1.5% of loan annually)
- 3% - 5% down payment typically required
A 620 borrower buying a $400,000 home might pay $200-300 more per month than a 740 borrower—significant, but still achievable.
Credit Score 580-619: FHA Is Your Friend
FHA loans were designed for borrowers with credit challenges. Benefits include:
- 3.5% down payment (vs. higher requirements elsewhere)
- More forgiving of past credit events
- Rates competitive with higher-credit conventional loans
- Manual underwriting available for unique situations
FHA does require mortgage insurance for the life of the loan, but you can refinance to conventional once your credit improves and you have 20% equity.
Credit Score 500-579: FHA with Higher Down Payment
You can still get an FHA loan with a score between 500-579, but you'll need 10% down instead of 3.5%. This is one of the only options at this credit level.
Below 500: Focus on Credit Repair
At this level, your best path is improving your credit before applying. Most lenders won't approve loans below 500, and the few that will charge extremely high rates.
Understanding "Bad Credit" Events
Lenders care about what happened, when it happened, and why:
Bankruptcy:
- Chapter 7: 2-4 year waiting period depending on loan type
- Chapter 13: Can often apply while still in repayment (12+ months of on-time payments)
Foreclosure:
- Conventional: 7 year waiting period (3 years with extenuating circumstances)
- FHA: 3 year waiting period
- VA: 2 year waiting period
Short Sale:
- Conventional: 2-4 years depending on down payment
- FHA: 3 years
Late Payments:
- Recent 30-day lates: May need explanation
- 60+ day lates: Significant impact for 12-24 months
- Mortgage lates: Particularly concerning to lenders
Credit Improvement Strategies
If you're not quite ready to buy, here's how to improve your score:
Quick Wins (30-60 days)
- Pay down credit cards: Get utilization below 30% (below 10% is ideal)
- Dispute errors: Review reports at annualcreditreport.com and dispute any inaccuracies
- Become an authorized user: Ask a family member with excellent credit to add you to an old, low-balance card
- Pay for delete: Negotiate with collection agencies to remove accounts in exchange for payment
Medium-Term Improvements (3-6 months)
- Establish on-time payment history (most important factor)
- Keep old accounts open (length of credit history matters)
- Add a credit-builder loan or secured card if you lack credit mix
- Avoid new credit applications (each one temporarily dings your score)
Realistic Timeline
Most borrowers can improve their score 50-100 points in 6-12 months with focused effort. A 560 borrower could potentially reach 640+ in a year, opening up significantly better loan options.
Compensating Factors
If your credit is weak, strengthen other areas of your application:
- Larger down payment: 10-20% down shows commitment and reduces lender risk
- Cash reserves: 3-6 months of payments in savings demonstrates stability
- Low debt-to-income ratio: Keep total monthly debts (including new mortgage) below 40% of gross income
- Stable employment: 2+ years in the same field, consistent or increasing income
- Letter of explanation: For specific events, explain circumstances and show they're resolved
What About Colorado-Specific Programs?
Colorado Housing and Finance Authority (CHFA) programs have their own requirements:
- Minimum 620 credit score for most programs
- Income limits apply
- Homebuyer education required
If your score is below 620, focus on credit improvement before pursuing CHFA assistance.
The Real Cost of Lower Credit
Let's be honest about the numbers. On a $400,000 loan:
| Credit Score | Estimated Rate | Monthly Payment | Extra Cost vs. 740 |
|---|---|---|---|
| 740+ | 6.25% | $2,462 | Baseline |
| 680 | 6.75% | $2,594 | +$132/month |
| 620 | 7.50% | $2,797 | +$335/month |
| 580 (FHA) | 7.25% | $2,729 + MIP | +$267/month + insurance |
Higher rates cost more, but compare that to rent. Even at higher rates, you're building equity and benefiting from appreciation. You can always refinance when your credit improves.
Your Next Steps
- Check your scores: Free at annualcreditreport.com and through many credit cards
- Talk to a lender: Get a realistic assessment of your options (we offer free consultations)
- Make a plan: Whether that's buying now with available programs or improving credit first
- Start preparing: Save for down payment, gather documents, avoid new credit issues
Imperfect credit doesn't mean you can't buy—it means you need the right guidance. Contact Cedar Home Loans for an honest assessment of your situation and a realistic path to homeownership.
