People can have bad credit for all kinds of reasons. Does that mean they can’t own a home of their own? A bad credit score will make the process more challenging, but getting a loan and becoming a homeowner can happen.

Buying a home with bad credit is possible with patience, determination, and an understanding of how the home buying process works.

A good deal of a person’s ability to buy a house hinges on the credit score assigned to them by three credit bureaus: Equifax, Experian, and TransUnion. These agencies compile data regarding the following:

• Payment history (whether someone pays their bills in full and on time)
• Credit utilization (the amount of credit used by the individual)
• Age of accounts/amount of new credit (the older the credit accounts the better)
• Credit mix (a variety of credit cards, car loan, and personal debt, is preferable to credit all in one category)

The bureaus each use a different formula to come up with a numerical score, ranging from 300 to 850. Anything below 580 is considered a poor score and will affect the person’s ability to secure a loan on a house.

Individuals can request a free copy of their credit report from each of the three sources every year or by using sites like annualcreditreport.com. It is best to know what is in it before starting to shop for a mortgage lender or a home.

It is always a good idea to go over the reports carefully to check for errors and to make sure paid items are removed. Mistakes do happen, and there are procedures in place to dispute things that are possibly making a credit score look worse than it actually is.

Banks and mortgage lenders look at an applicant’s credit score, but that number is just part of the picture. They will also want to know that a person has a steady income, and what their debt-to-income ratio is—in other words, how much of their salary they can afford to pay toward the money they owe. Very simply, they want people with the ability to pay a loan back.

Other debt, such as car loans, student loans, and bankruptcy filings will be examined too. Finally, they will figure in how much of a down payment the applicant is able to pay. The larger the down payment, the lower the amount needed, which means less money on the line for the lender.

All of these factors result in the bank or lender deciding whether or not to approve a mortgage for the individual. Having a lot of debt won’t necessarily stand in the way of a loan if there is evidence that there will be enough income to pay it off.

It doesn’t seem logical, or fair, but buying a house costs more for people with bad credit than it does for those with good credit. But a low credit score can indicate that a borrower is less able to pay, either because they do not make much money, they already have a lot of unpaid debt, they pay their bills late (or worse, not at all), or some combination of these. A bank that lends them money is taking a chance that they may never get paid back.

To make up for taking that risk, lenders will charge a higher interest rate on the loan. Even a small difference, for example, a rate of 5% instead of 3% can cost thousands of additional dollars every year. Multiply that by a 15- or 30-year mortgage, and over time, the house is much more expensive than the asking price.

Loans for people with bad credit (also called subprime loans) often come with additional costs. Private mortgage insurance (PMI) is required when a buyer can not afford a down payment of 20% of the purchase price. And the more debt someone has, the less likely they are to be able to scrape together a large down payment. PMI usually consists of an upfront payment of approximately 1.75% of the loan amount plus a premium of .7% to .85% annually.

Upkeep, homeowners insurance, and taxes for a home are no more expensive for someone with bad credit than with good credit. However, paying for it all can be more challenging for someone already struggling to pay off existing debt. And that is assuming there are no emergencies like a roof repair or a broken furnace. 

First-time buyers or anyone with bad credit should be aware of these extra costs before deciding whether or not they are ready to become homeowners. Some people might decide to postpone a purchase while they pay down their debt, work on improving their credit rating, and save more for a down payment.

If you want to buy, but have bad credit, there are some things that can improve the chances of securing a mortgage and getting into a house.

• Improve the debt-to-income ratio and credit score in general by paying off as much debt as possible.
• Determine a realistic price range. Some experts recommend that the monthly amount of principal, interest, taxes, and insurance should not exceed 28% of your gross income. Not being able to keep up with the mortgage and expenses will make credit worse. And selling might not be an option if the value drops and the house is worth less than you owe.
• Avoid taking on any additional debt, especially while trying to qualify for a mortgage. 
• Save as much for a down payment as possible, aiming for at least 20%. Even if securing a loan with a lower amount is possible, you will pay in other ways such as a higher interest rate and PMI.
• Consider an FHA loan. Insured by the Federal Housing Administration, these loans require a lower downpayment from people with bad credit. Someone with a credit score of 580 can qualify with as little as 3.5% down. A score of 500 to 579 requires 10%. FHA does require upfront and annual PMI premiums.
• VA loans for military veterans and their spouses, and USDA loans for people buying in certain rural areas of the country are good options for those in these categories. They offer good rates for little or zero down payment.

Consult with a housing counselor. HUD, the U.S. Department of Housing and Urban Development has a list of approved, free, or low-cost counselors that and help guide people with bad credit through their mortgage options and the home buying process.

Buying a home with bad credit can be a challenge, but it can be done. Do what you can to repair your credit by paying down your debt as much as possible. Take a close look at what you need as opposed to what you want. Some sacrifices and discipline might be necessary to save as much money as possible for a down payment. It will all be worth it when you are handed the keys to your very own home.