How to get a mortgage with bad credit
After the financial crisis in 2008, banks have made it more difficult to get mortgage loans, often requiring the prospective borrower to have a credit score that is above a certain minimum level, in addition to other factors. If you have bad credit, many lenders will view you as high risk and will deny your mortgage request, making it difficult to purchase your own home. Fortunately, it is possible to get a mortgage with bad credit, though you will have limited options, a higher interest rate, and you may have to make some adjustments to your financial situation before the bank will approve your request.
Check Your Credit Report for Errors
Before approaching a lender, purchase a copy of your credit report and look over the data for incorrect information, such as collections that aren’t valid, unpaid accounts that have been paid off, and loans that you didn’t take out. Dispute any incorrect information. Once the incorrect data has been removed, your credit score will improve, increasing both your chances of getting a mortgage and the loan options available to you.
Offer a Larger Down Payment
Banks hesitate to give individuals with bad credit a mortgage due to the risk involved. The risks the lender assumes decrease when the borrower pays a larger down payment, which reduces the size of the loan required. Offer to pay a larger down payment than is typical in your area, or consult with the bank and ask what down payment percentage they require in order to approve your mortgage. Spend an extra year saving up the larger down payment if necessary, during which time you can also improve your credit score.
Pay Off Outstanding Loans and Debts
If you already have outstanding loans in addition to bad credit, such as a car loan or a credit card with a high balance, lenders may deny your mortgage request. Paying off these debts will have a two-fold benefit: you will decrease the amount of money you owe and the inherent risks that come with that, and will simultaneously increase your credit score. The positive change in these two factors may be the boost you need to get a mortgage. Pay off your smallest bills first; paying off an account in its entirety will have a larger impact on your credit score than slowly reducing a very large loan.
Increase Your Salary
A debt-to-income ratio that is skewed so that the majority of your income is being spent to pay off your bills makes you a high risk to lenders. While paying off your debts will greatly increase your chances of getting a mortgage, it is a long term solution that takes a while to implement. A faster solution is to take on a part time job, which will increase your income while decreasing the percentage you spend each month on bills. This simple change, in addition to slowly paying down your debts, verifying that your credit score is correct, and saving a larger down payment, will help you get a mortgage loan with bad credit.