How to Qualify for a Mortgage with Poor Credit

Your credit history is one of the most important parts of your application when applying for a mortgage. Bad credit or a low credit score will compromise your ability to get a mortgage, because lenders will consider you at risk of defaulting on your loan. Obtaining a mortgage has become even more difficult due to the struggling economy and the record number of foreclosures in the housing market. It is still possible to get a mortgage and buy a home, even if your credit history is imperfect. Qualify for a mortgage with bad credit by working to improve your credit score and establishing that you are an acceptable lending risk.

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1. Check your credit report.
All Americans are entitled to a free credit report every year through the Federal Trade Commission.

Make sure everything on your credit report is accurate before you try to qualify for a mortgage. If there are any errors or inconsistencies, write to the credit company and provide documentation to support your update.

2. Expect to pay more interest.
Your bad credit will mean that you need to pay more for your mortgage. Be prepared to accept a higher interest rate, or an Adjustable Rate Mortgage (ARM), which has an interest rate that changes.

3. Demonstrate a steady income.
Showing that you have a good job that pays enough to cover your mortgage will help your chances of getting a loan with bad credit.

4. Eliminate all other debt.
If you have a high debt to income ratio, you will have a harder time getting a mortgage, especially with bad credit. Pay off all credit card balances and other loans before you try to qualify for a mortgage. Even if your credit is bad, showing that you have no current debt will help your application.

5. Make a higher down payment.
Put down as much money as you reasonably can when applying for a mortgage. This will show the lender that you have a serious investment in not losing your house, and a better chance of paying your mortgage. It will also demonstrate your ability to save.

6. Write down explanations for all of the negative items.
Sometimes, explaining to a lender why you had problems paying your bills will help. For example, if you went through a divorce or suffered a major illness or medical problem, it will not excuse your bad credit, but it will provide context for the lender.

Address any past foreclosures or bankruptcies. If your bad credit is partly due to defaults on major loans in the past, you will need to provide an assurance that this will not happen again. Point out that you now have a higher income, a larger savings or better financial stability in general.

7. Consider government programs.
Loans guaranteed by the federal government, such as the Federal Housing Administration (FHA) loan and the Veteran’s Administration (VA) loan often have flexible credit requirements.

8. Look for a co-signer.
Ask someone with good credit, such as a parent or other family member, to co-sign your loan. This might help you qualify for a traditional mortgage with bad credit. Keep in mind that if you default on your mortgage payments, your co-signer will be held responsible. It is a lot to ask of someone.

And one additional tip… Consider Waiting.
Think about waiting until your credit improves before applying for a mortgage. Consider all of your options, and remember that it might be better to avoid a bad credit mortgage. You might prefer to wait a few years and qualify for a traditional home loan.

Patrick Parker Realty has a network of preferred Mortgage Brokers. Contact Us if you’d like to be referred to a Broker so you can follow-up with questions specific to your situation.

Learn more about The Difference Between A Mortgage Lender and a Mortgage Broker.