If you have bad credit, it doesn’t have to keep you from buying a home. Many lenders offer programs for people just like you. With the following steps, you can make the American Dream of owning a home part of your reality.
Increase Your Credit Score
The first step is obvious. You should try to increase your credit score as much as you can. This starts with checking your credit report for accuracy. You should also look for little things you can fix. You can head here to get a free copy of your credit report from each of the three bureaus.
Once you have one or more of your credit reports, look at the information reported. Is everything accurate? If you find any errors, dispute them with the credit bureau right away. If you send the request in writing and provide proof of why you think it’s a mistake, the credit bureau has 30 days to resolve the issue. If the creditor doesn’t respond to the credit bureau within that time, the credit bureau must delete the misinformation from your credit report.
If you find the information reported is correct, but it’s something you can fix, go for it. For example, if you have late payments, bring them current. If you have large credit card balances, try to pay them down or even off in full if you can.
Whatever you do, don’t close any credit card accounts or open new accounts during this time, though. Either of these could lower your credit score even more.
Save Money for a Down Payment
If you have bad credit, chances are that you aren’t going to find a ‘no down payment’ loan. Instead, you will run into lenders that want a sizeable down payment. Start saving for this as early as you can because the more money you have to put down on a home, the higher your chances of approval become.
We aren’t saying you need 20% down or you won’t get a mortgage. What we are saying is that the more money you have available, the higher your chances of getting a lower interest rate and better term become. Lenders want to know that you have some investment in the home. If you have ‘bad credit,’ you already pose a high risk to a lender. They want some compensating factors to make up for that risk in order to give you a loan.
Every lender will differ in the amount of the down payment they require. You may find loans provided by lenders for borrowers with bad credit that only require a few thousand dollars down, though. It’s up to you to figure out which loan works the best in your situation.
Lower Your Debt Ratio
Again, because you have a low credit score, you want to make the rest of your application look as attractive as possible. This includes your debt ratio. Because you will likely use a portfolio lender, there isn’t a specific debt ratio that you need. In general, though, you want it as low as possible.
You’ll have two debt ratios – your housing ratio and your total debt ratio. The housing ratio is the comparison of your new housing payment to your gross monthly income. Your total debt ratio is the number you have control over at the moment. It compares your total debt to your gross monthly income.
Your total debt includes minimum credit card payments, monthly installment payments, and your new housing payment. Keeping those credit card balances to a minimum will help lower this ratio, giving you a better chance at securing a mortgage.
Shop for Portfolio Lenders
Here’s the tricky part. You aren’t going to find your standard conventional or FHA lenders. If your credit score is too low, you won’t qualify for these programs. Although don’t discount the value of the FHA loan. Technically, you only need a 580 credit score to get an FHA loan. But you need other qualifying factors too. Some FHA lenders require slightly higher credit scores too, especially since they can offer you a loan with as little as 3.5% down on the home.
Portfolio lenders keep the loans on their books. What does this mean for you? There aren’t any secondary investors. In other words, no one else has a say in which requirements you need to get the loan. This can be great news for you, especially if you find a lender that will take a credit score as low as yours is at the moment.
Make sure you shop online, in person, and maybe even with a mortgage broker. You should know all of your options as portfolio lenders are everywhere. You aren’t going to see their products advertised as much as you’ll see the standard FHA and conventional loans advertised, though. This is why you’ll have to do some legwork and digging to get the loan you need.
Get Pre-Approved and Choose a Lender
The final step in securing a mortgage with bad credit is to get pre-approvals from the lenders you have found. You won’t know which lender will suit you the most until you see the details of the loan. Each lender must provide you with a Loan Estimate, which includes the potential loan amount, interest rate, payment, APR, and closing costs.
Sit down and compare the Loan Estimates to one another. Which one suits your needs the most? Don’t focus strictly on the interest rate. Look at the big picture. How much does each loan cost you over its lifetime? Which loan has the most affordable payment while keeping your costs on the lower end in the end?
Once you choose a lender, you can move forward with their process. At this point, you can start shopping for a home because you know how much loan you can afford and what a lender will give you.
Keep in mind that preapprovals are usually good for 30 – 60 days, so keep on looking for a home, and stay in contact with your lender in the meantime. If your preapproval expires, you’ll have to go through the preapproval process all over again in order to ensure that you are still qualified for the loan.
Getting a mortgage with bad credit isn’t as hard as it seems. Lenders have loosened their guidelines and more portfolio lenders are popping up every day. Be diligent in your search and find the lender that will give you the loan that makes the most sense for you.Click to See the Latest Mortgage Rates»