How to Get a Mortgage When You Have Bad Credit

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Have you been thinking about getting a mortgage? Do you have bad credit? If you do have bad credit then it can be difficult to secure a mortgage. 

Difficult but not impossible. You can get a mortgage even if you have bad credit, you will just have to do things a bit differently than someone with a good credit score would.

Take a look at how your application will be examined and then look at your options for making your dream of owning a home a reality.

Can You Buy a House with Bad Credit?

As mentioned earlier buying a home when you have bad credit is possible it’s just not easy. You will have to make sure that you have an airtight plan for securing a mortgage. The process of buying a home with bad credit is different for everyone and what worked for someone may not work for you.

It all depends on how bad your credit is. Your current source of income will play a large role in whether you qualify. If it is steady then you have a good chance of getting a mortgage.

To decide if you qualify for a mortgage, a lender will look at all the debts that you have. If they think they can work with your credit score, income level and if your debts seem manageable they will work with you.

Get Your Credit Report

The first thing to do is to take a look at your credit score. You may find that different credit bureaus have varying scores but they will almost always have the same average score. Credit scores are divided into five categories. 

They are poor, fair, good, very good, and exceptional. A score that is under 580 is considered poor. A good score starts at 670 and an exceptional score starts at 800.

Your Interest Rates Will Be Higher

If your credit score is under 580 then it will signal to lenders that you are high risk. Being high risk means that you will have higher interest rates on your loan.

With a bad score, you will see your percentage interest rise by at least two points or more. For example, someone with a good interest rate may get a mortgage with 3 percent interest while you will get a mortgage with an interest of 6 percent.

This may not seem like a large difference but it does add up as mortgages tend to last for several decades. If you start with a higher interest rate that doesn’t mean that you will be stuck at this rate forever. As your credit score improves you can refinance your mortgage and get a better rate.

How Your Debt Will Be Paid?

Even if your credit score is bad, lenders will consider your debt-to-income ratio when deciding whether to give you a mortgage or not. The income ratio will analyze how much money you spend monthly on your debts to your overall monthly income.

This is calculated so that the lender can get a good idea of how much money you spend on debt and how much you have leftover. When calculated your debt to income ratio should be below 36 percent.

If you have a bad credit score and a high debt to income ratio then it is probably best to work on paying off a good portion of your debts before pursuing a loan.

You can calculate your debt to income ratio by adding up all your debt payments. Here are some examples of things you would typically add up.

  • Credit cards
  • Car loans
  • Student loans
  • Mortgage payments (future)

You can then divide it by the amount of money you earn monthly. This will tell you if your debt to income ratio is below 36 percent. 

You can also use an amortization calculator to help you determine how much your monthly mortgage would be. After using the calculator you will see whether you can afford the mortgage or not.

Time to Make a Budget

Even before you start daydreaming about the perfect home. You need to take a close look at what you can afford. This means that you need to look at your budget.

Make sure you don’t splurge on a larger house than you need. The last thing you want is a mortgage that does not allow you to comfortably save, invest, and use your other expenses.

You will already be at a disadvantage when buying a home with bad credit. This means more than ever you need to buy a home with a mortgage that will only be between 28 to 30 percent of your annual income.

Get Your Downpayment Right

When you have bad credit you have to find as many workarounds as you possibly can. One way to ensure that you look more attractive to lenders while cutting down your mortgage payments is to put down a sizeable down payment.

The bigger the down payment the greater your opportunity to get a mortgage when you don’t have the best credit score. A downpayment of anywhere between 20-30 percent is sizeable and should help you with your bid to secure a mortgage.

Improving Bad Credit Quickly

There are a few tricks you can use to improve a bad credit score a bit more quickly. The first option to increase it would be to pay off a lot of money as fast as you can. However, other options will work if you can’t come up with that kind of cash.

The first would be to increase your available credit limit. You can request an increased credit limit at your lending institution. This will increase your score fast because you will be decreasing how much credit you have used.

Many credit card companies will not give you a hard time about increasing your limit, so don’t hesitate to put in a request.

Another option you may want to consider is adding more credit. You can do this by getting new credit accounts. The best way to leverage this strategy is to add your new accounts in bulk.

All your new accounts will age together and you will also have more available credit added to your report. Just be disciplined enough to know that this move is strategic so that you can get a better mortgage. Avoid any unnecessary spending.

Get Deletions

If you have collections on your credit history then this can make things worse for you. Collections show a potential lender that you owe money and did not try to pay it back. Needless to say, this does not make you look good and it does not inspire confidence in a mortgage lender.

If you have something like this on your record, do not despair. If you did eventually pay then it will be recorded as paid. However, the best solution would be to pay to get these collections permanently deleted from your history.

Get Your Dream Home

You now know how to go about getting your dream home even if you have bad credit. The key takeaway is that it is possible and you should at least try before giving up.

Make sure you are upfront with your lender about what you owe and about your credit history. You should also try to do a sizeable downpayment if you can. However, if you can’t you should not give up. You may be surprised to find that when your finances are viewed in their entirety that you do qualify to get a mortgage.

Jeff Campbell

Jeff Campbell is a father, martial artist, budget-master, Disney-addict, musician, and recovering foodie having spent over 2 decades as a leader for Whole Foods Market. Click to learn more about me

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