You have bad credit and assume your days of getting a mortgage approval are long gone. Luckily, that’s not the case. There are ways you can get approved. You have to be creative and consistent. Ready to get started?
Read on to see what you can do.
Try Government-Backed Loans
Conventional loans aren’t the only mortgage available. Government-backed loans offer a great alternative. They usually have low interest rates and fees. Even better, though, they have less stringent guidelines.
FHA loans, for example, require a 580 credit score and a 31/43 debt ratio. Conventional loans, on the other hand, usually require at least a 620 credit score. Most lenders want a higher score, though. They also have maximum debt ratios of 28/36.
If you are a veteran, you may be eligible for a VA loan. It has the same low credit score and high debt ratio guidelines. The difference is in the down payment – you don’t need one! You can secure 100% financing, even if you have bad credit.
One last government-backed loan is the USDA loan. If you buy a home in a rural area, you may qualify for this loan. You’ll need a 640 credit score, but very little income. In fact, the less money you make, the more likely you are to qualify for the loan.
Try Subprime Loans for Mortgage Approval
If government-backed loans don’t do it for you, try subprime loans. You’ll find these loans with smaller lenders – not the big commercial banks you see everywhere. A bank that will write and keep the loan on its books can make its own rules.
For example, let’s say you have a low credit score, but you have a lot of assets and steady income. A lender might look at your big picture and not see you as risky. Your credit score will preclude you from a conventional loan, but a subprime lender may not see you as high risk.
Some lenders make it a practice to loan to high-risk borrowers. Of course, this comes at a price. You’ll usually pay a higher interest rate and/or higher fees. Make sure you understand the terms and costs before closing on the loan.
Increase Your Down Payment
If you have a low credit score, a lender will look for compensating factors. A big one is a large down payment. Take for example, two different borrowers:
Joe has a 600 credit score and no assets. The only money he has what he’ll use for the 5% down payment and the closing costs. Joe also has a higher than normal debt ratio. A lender will look at Joe as very high risk. He probably wouldn’t receive conventional financing. Chances are he might not get any financing at all.
John also has a 600 credit score. But, John has a lot of assets. He plans to put down 20% on the home. Plus, he’ll have some money left in his savings account. John has a slightly elevated debt ratio, but it’s not as high as Joe’s. John will likely have an easier time securing a mortgage. Even though they have the same credit score, John is less risky because of the money he’ll invest in the home. John is more likely to keep up with his mortgage payments than Joe.
Have Timely Housing Payments for Mortgage Approval
Even if this is your first mortgage, you can show a lender timely housing payments with your rent. If you have proof of at least 12-months of on-time housing payments, you’re in good shape. Lenders want to see that you can afford a regular payment as large as the housing payment.
Of course, it helps if your rent payment is close to the amount of the potential mortgage. It doesn’t have to be exact, but if the new mortgage payment far exceeds the rent you paid, it won’t help. Lenders try to minimize the ‘payment shock’ you experience with the new mortgage.
If you have on-time rent payments and the amount is near the new mortgage, though, it can help you overcome your bad credit issues.
Write an Explanation
Sometimes a loan application isn’t black and white. Some situations require an explanation. For example, if your credit score dropped suddenly 6 months ago because you were hurt on the job, you have an explanation. On paper, all a lender sees is that you stopped paying your bills.
If you write a formal Letter of Explanation, though, you can let the lender know the situation. Give them as many specifics as you can. If it’s possible, you should also include proof, such as medical bills or a letter from your employer.
This way the lender doesn’t just assume you are financially irresponsible. He can then make a better judgment call.
Get a Cosigner
You can also ask someone to cosign on the loan for you. Tread lightly with this one, though. Only ask someone that you trust and have a good relationship with. This is a big undertaking on their part. If you stop making your mortgage payments, they become responsible.
If you choose a cosigner that has better credit and few debts, though, it can really help your situation.
Getting a mortgage approval with bad credit isn’t impossible. As you can see, it just requires a little creativity. You have to think outside the box. With a few simple steps, you may be able to get the mortgage you need.
Even if you have to take one with a higher interest rate or fees than you’d like, you can refinance in the future. For now, focus on getting your home and paying your bills on time. Once your credit improves, you can refinance into a different loan.