To handle bad credit when buying a home, first review and dispute inaccuracies on your credit report. Pay all bills on time for at least a year to rebuild payment history. Reduce credit utilization to below 30% and consider becoming an authorized user on a trusted person’s account. Save for a larger down payment (20% or more) to qualify for a conventional loan or aim for an FHA loan with a 3.5% down payment. Seek pre-approval from lenders to understand loan options and improve your chances of approval.

Rebuilding credit is critical because mortgage lenders use credit scores to assess risk. A lower score often leads to higher interest rates or denial of loan approval. For example, borrowers with scores below 580 may struggle to qualify for conventional loans, while those with scores between 580-620 face higher down payment requirements or interest rates. According to Experian, the average U.S. credit score in 2023 was 714, but scores below 620 significantly increase mortgage costs. FHA loans, which cater to lower-credit borrowers, require a minimum score of 580, but lenders may reject applications below this threshold. Additionally, payment history accounts for 35% of a credit score, making timely payments essential to improve standing. Data from the Consumer Financial Protection Bureau shows that 28% of mortgage denials in 2022 were due to credit score issues, underscoring the need for proactive credit management. By addressing credit report errors, maintaining consistent payment behavior, and saving for a competitive down payment, buyers can mitigate the impact of bad credit and secure favorable loan terms.