What You Need to Do to Get a Mortgage With Bad Credit

by Carson BuckNovember 22, 2017

Getting a Mortgage With Poor Credit Is Tough, But Possible

If you have bad credit, you might feel like you’ll never get to experience the joys of homeownership. While it is true that your credit history does play an important role in qualifying for a mortgage, it is not the only factor. In fact, getting a home with bad credit isn’t as uncommon as you might think.

Today, there are several options available that can help you get the home you want despite your poor credit rating. Here are some tips and considerations to keep in mind that might give you the confidence to start looking for your next home sooner, rather than later.
Getting a Mortgage with bad credit is challenging

First, Get Familiar With Your Credit

Before you start shopping for homes, you have to know what you’re up against and this means obtaining a copy of your credit report and score. Closely review your credit report to make sure there are no incorrect listings or wrong account information included. If you notice something isn’t right, be sure to dispute it with the appropriate credit-reporting bureau. Removing any incorrect information can help improve your score.

You’ll want to be realistic in terms of where your credit score places you in the loan approval game. Lenders are approving more loans for borrowers with poor to fair credit these days simply because so many Americans have experienced situations that caused their credit ratings to slip.

Other Factors That Impact Your Qualification Chances

The credit score is just one part of the puzzle that lenders consider before they will approve a borrower with poor credit. Other compensating factors can include:

  • Size of down payment
  • Debt-to-income ratio
  • Amount of outstanding debt
  • Income
  • Amount of cash reserves
  • Length of time with employer
  • Amount of mortgage payment vs the borrower’s rent payment

Getting a Mortgage with bad credit is challenging

The Popular Option: FHA Loans

FHA loans were created in 1934 by the Federal Housing Administration to help increase the number of homeowners in the United States. This type of loan is insured by the federal government, so lenders tend to be a little more lenient with approvals for FHA loans. While conventional loans require credit scores of 620 or higher, it is entirely possible to get approved for an FHA loan with a credit rating of 500.

The difference, of course, is the amount of the down payment that will be required. For instance, if your credit is between 500 and 579, then most lenders will want at least 10 percent down. For scores of 580 and up, only 3.5 percent is needed. Unlike conventional loans, FHA loans allow gift funds to be used for the down payment.

VA Home Loans

If you’re active duty or a veteran of the US Armed Forces and you have poor credit, you may still be able to qualify for a zero-down mortgage from a VA lender. Although the VA doesn’t have set minimum credit score requirements for loans backed by the Veterans Administration, most lenders will want to see a score of at least 620.

But, every lender is different and there are some VA lenders out there that will approve this type of loan for borrowers with scores of 580. If you’re interested in a VA loan, then you should thoroughly research lenders to see what their credit requirements are before you select one.

Down-Payment Assistance / Grants

If your credit rating is poor but workable, and you’re having a hard time coming up with the money for your down payment, there are down payment assistance programs and federal grants that can help. Check your city and/or county websites for available programs in your area. You can also visit the website for HUD for a listing of local home-buying programs by state.
Getting a Mortgage with bad credit is challenging

How to Start Improving Your Credit

If you have poor (580-639) or bad (579 and lower) credit, then anything you can do to help improve your score will help tremendously toward your goal of buying a home. Here are some things you can do to start turning your credit around:

  • Pay down your credit card balances
  • Do not apply for new lines of credit
  • Do not miss any loan or credit card payments
  • Get a secured card, use it responsibly, and make on-time payments

Additional ways you can improve your credit include being added as an authorized user on a family member’s credit card that’s in good standing. You also need to stay up on your credit report and dispute any incorrect, negative information. If you pay off an account that was in collections, make sure you contact the creditor so they can either mark the account paid or remove it entirely.

Getting a home loan with bad credit is not impossible, but it is definitely more challenging. The above information will help get you on the right path so by the time you’re ready to apply for a mortgage, you’ll be in the best position possible, even if you don’t have excellent credit.

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About The Author
Carson Buck
Carson is a real estate agent based out of Phoenix, Arizona. Carson loves data and market research, and how readily available it is in today's world. He is passionate about interpreting these insights to help his clients find and buy their perfect home. Carson got into the real estate industry because he loves the feeling of handing over the keys to a new home to happy clients. In his free time, he works on his backyard bonsai garden and spends time with his wife, Julia.