This article is a guest post from the website mortgagewiki.org. You can visit their website to read guides and tips for homeowners, and potential home buyers.
How to Get a Mortgage With A Bad Credit Score
Having a bad credit score makes it much harder for anyone to apply, and get approved for a home mortgage loan. Even if you are approved, the terms of the loan will likely carry a higher-than-normal interest rate, expensive penalties, more expensive PMI, and other add-on costs.
You may also run into higher costs down the road – for example, your homeowners insurance will likely quote you a higher rate if your credit score is below 620.
Below is a list of things you can do today to improve your chances of getting approved for a mortgage with a bad credit score.
#1. Actively Work to Improve Your Score
A lot of lenders are going to have a minimum credit score requirement to apply for certain types of mortgage loans. And even if approved, the mortgage rate you’re quoted, can be drastically higher vs. a person with a higher score.
Example: A person with a credit score of 300-549 might be quoted a mortgage rate that’s 2-3 times higher vs. 740-850 credit score.
Below is a chart of how lenders and banks view your credit score.
Another way your credit score influences your home buying options is the down payment requirement. If you want to put less than a 20-percent down payment on a house you’ll likely need a credit score above 700.
Five tips to improve your credit score:
- No more late or missed payments
- Pay off more than the minimum balance
- Dispute errors on your credit report
- Lower your credit-to-debt ratio
- Ask for higher limits on your credit cards
Read more tips on improving your credit score.
#2. Talk With Your Lenders
“What is your ultimate goal?
It’s to present an ideal credit score so that a lender will offer you the best mortgage rate and with favorable terms. Since you want to be seen in a good light, talk with your lenders and request them to remove late payments, missed payments, and other small occurrences that blemish your credit report.
Also explain what actions you’re taking to prevent past incidents from happening again.
#3. Stop Applying for New Credit Lines
Every time you apply for a new line of credit your credit report takes a small ding. This includes a request for a home mortgage loan, but also if you apply for a new credit card, personal loan, car loan, etc.
FYI: Requesting a new line of credit lowers your score 5-10 points.
#4. Lower Your Credit-to-Debt Ratio
Mortgage lenders consider the usage on credit cards, which means if you’ve already maxed out your credit card(s), then it will negatively affect your credit score.
Better Credit Tip: Make an effort to limit each credit card and credit line to 10-15% of the total credit limit available.
Example: If your credit limit is $5000, don’t spend more than $500-$750.
Paying off your balance is obviously the best option, but increasing your credit line can have the same effect on your credit-to-debt ratio.
Another option is to consolidate your credit card balances. This involves some nitty-gritty details, and for that reason, you may have to consult with a financial advisor or a debt consolidation firm.
If you don’t want to spend money, and use organic methods, then you can follow some quick ways to improve your credit utilization or credit-to-debt ratio.
#5. Negotiate With Your Lender
If a mortgage lender won’t approve you for a loan because of your less-than-ideal credit score, it’s because they’re worried you won’t be able to repay it. If you can assure him that you can pay off the money that you are borrowing, and your credit score dropped because of circumstances, then you might be able to get the loan.
You can also propose ideas such as a larger home down payment or private mortgage insurance (PMI) options. This helps lower a lender’s risk and therefore makes you a more attractive borrower.