If you’re in the market for a new home and have a low or “bad” credit score, you might be worried about getting a mortgage loan. While it is true that the higher your credit score, the more likely you’ll be approved for a loan, the goal of homeownership is still possible. You can qualify for a mortgage loan if your credit score is low. Buying a house with bad credit can go a lot smoother if you start with a plan and are willing to do some extra work. Here are ten tips to better prepare for the mortgage loan process if you have a poor credit history.
Find out your credit score
Mortgage lenders will check your credit score when you start the pre-qualification process for a home loan. So it only makes sense that you should know what your credit score is before applying. To find your score, take advantage of the free report that is available once per year from each credit bureau.
Check your credit report for errors
From identity theft to clerical errors in reporting, mistakes on your credit report can cost you. Before applying for a loan, review your report to look for names, accounts or addresses you don’t recognize or inaccuracies.1 If you find information that you believe is incorrect, annualcreditreport.com recommends that you “contact the business that issued the account or the credit reporting company that issued the report.”2 Find more resources for disputing errors on credit reports from the Federal Trade Commission.
Determine your debt-to-income (DTI) ratio
In addition to your credit score and credit history, your debt-to-income ratio plays a significant role in whether you’re ready for a new home mortgage. To calculate your DTI, add up all of your monthly debt payments and divide them by your monthly income before taxes. Recently, both Fannie Mae and Freddie Mac announced that they would allow DTI limits of up to 50% for conforming loans.
Be flexible when house hunting
Do you have your heart set on a specific number of bedrooms or a particular neighborhood? You may need to revisit your new home “must-haves.” Aim for a lower-cost starter home, and your chances for loan approval may increase because your loan amount will be lower, recommends news and investment site The Street.3
Save for higher down payment
“The smaller your down payment, all other factors being equal, the lower your chances of mortgage approval,” advises The Mortgage Reports.4 This is because you won’t have to borrow as much. However, there are affordable lending options for first-time homebuyers and down payment assistance programs designed for homebuyers who can afford monthly mortgage payments but don’t have enough money saved for 20% down payment.
Prepare to pay mortgage insurance
Private mortgage insurance, or PMI, is an extra layer of protection for the lender required with some loans. If you are unable to save for a higher down payment of 20%, be prepared to pay PMI.
Accept a higher interest rate
If your credit score is less than ideal, lenders see you as a higher risk. It’s not uncommon to expect to pay an interest rate that’s higher than someone with an excellent credit score.5
Find ways to upgrade your credit score
The good news is that you can take action to build a stronger credit score over time. The Consumer Financial Protection Bureau advises that you make your payments on time, every time.6 While Experian counsels borrowers to pay off debt and keep balances low on credit cards.7
Decide how to apply
If it’s your spouse with the bad credit, consider your options of applying either individually as a single applicant or together as joint applicants. According to Experian, “Lenders don’t just average out your two credit scores or go with the highest one when evaluating your creditworthiness as a pair—they pay the most attention to the lowest credit score. If your credit is great but your spouse’s isn’t, a joint mortgage application could be denied.”8
Educate yourself on affordable lending programs
These affordable lending programs make homebuying more affordable and offer a variety of benefits for borrowers who qualify.
- Since FHA loans were designed for low-to-moderate income borrowers, they offer options to borrowers with lower minimum down payments and credit scores as low as 580
- USDA loans are available to eligible homebuyers with low-to-average income for their area with credit scores as low as 600
- With no down payment, low credit score and flexible income requirements, qualifying for a VA loan can also be easier than other mortgage financing programs for eligible homebuyers
- The Fannie Mae HomeReady® mortgage and Freddie Mac Home Possible® mortgage offer first-time and repeat homebuyers a down payment option as low as 3% of the purchase price with conventional financing
Regardless of your credit history, an experienced mortgage professional will guide you on the steps to take to improve your score and make an informed decision about choosing the best lending option available. Find your nearest Guild Mortgage branch office.
The above information is for educational purposes only. All information, loan programs & interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.
1What should I look for when I review my credit report? – AnnualCreditReport.com
2What should I look for when I review my credit report? – AnnualCreditReport.com
3How to Buy a House With Bad Credit – TheStreet
4What are your chances of mortgage approval? – The Mortgage Reports
5This is how much bad credit affects your mortgage – MarketWatch
6How do I get and keep a good credit score? – Consumer Financial Protection Bureau (CFPB)
7How to Improve Your Credit Score – Experian
8Can I Buy a House If My Spouse Has Bad Credit? – Experian