If you’ve had some credit missteps in the past, you’ve probably noticed that your bad credit score has made it difficult to get approved for a loan.
If you’re looking to buy a house, though, you don’t have to wait until you have excellent credit. Why? Some mortgage lenders are willing to offer mortgages to people with bad credit. Here are some tips to keep in mind as you try to achieve your goal of becoming a homeowner.
Check Your Credit Score
Credit scores can range from 300 to 900, and your credit is considered bad if your score is in the 300 to 599 range.
But depending on the reasoning behind your low credit score, you can make some changes that can boost your score quickly, giving you a better chance of getting approved for a loan.
For example, there may be errors on your credit report that are dragging your score down. By disputing those errors with the credit reporting agencies and the creditors, you can get the errors removed, which in turn may boost your credit score.
Also, your score may be low due to your high credit card balances. By paying down your balances, your credit score will quickly bounce back.
There may be several other reasons for your bad credit score. It’s important that you get to the bottom of them and address the issues. This way you’ll hopefully start to see your credit score increase.
Save for a Large Down Payment
The more money you put down on your mortgage loan, the less of a risk you pose to potential lenders.
Not only does a sizable down payment show that you’re serious about the long-term commitment, but it also reduces how much you have to borrow.
Borrowers with good credit may be able to get by with a 5% down payment. But since you may not be able to lean on your credit history as much, you’d be better off with a down payment of 20% or higher.
Keep in mind, though, that it can take a while to save that much money. And if you have other financial goals, it may mean putting them on hold for a while.
If you think it will take you a long time to put together a 20% down payment, work on improving your credit during that time. This will make it easier to get approved with or without the large cash outflow.
Look for Bad Credit Mortgage Lenders
In addition to saving up for a big down payment, start looking for lenders who will help people get a mortgage with bad credit.
There are generally two options to consider: traditional mortgage lenders that specialize in bad credit loans, or private mortgage lenders.
Traditional Mortgage Lenders
While major banks may not be willing to lend to you, “B lenders,” which include trust companies, generally have lower credit standards for mortgage loans.
Start by searching the Internet to learn which lenders may be willing to work with your bad credit. Also, consider working with a mortgage broker, who can check with multiple lenders at once to see whether you qualify and what kind of rates and terms you can get.
Private Mortgage Lenders
Private mortgage lenders get their funds from individual investors (or groups of investors) and focus more on the property than the borrower.
This is because private mortgage loans are typically uninsured, so the lender needs to earn enough from selling the property to cover your loan if you end up defaulting.
The main drawback to working with a private lender is that interest rates are typically much higher than what you’d get with a traditional mortgage lender.
But if this is your only option, it may be worth considering until your credit improves and you can refinance. Just be sure to check for a prepayment penalty if this is your strategy.
Get a Co-Signer
If you’re not sure you can get a mortgage with bad credit, another way to get approved is to find someone with great credit to co-sign your loan.
A co-signer effectively promises to repay your mortgage loan if you can no longer make payments.
Also, a co-signer needs to provide documentation for income, expenses, and debt to get approved. As such, finding a willing family member or friend to co-sign can be difficult.
If you’re actively working on your credit, however, you can potentially have your co-signer removed from the loan later on. Letting a potential co-signer know that they’re not on the hook for decades can convince them to help you out.
Save for Extra Fees
Mortgage brokers typically get their commissions from lenders, not borrowers. But if you are looking to get a mortgage with bad credit, you may need to pay a broker fee.
Also, some lenders may charge extra fees to process mortgage loans for borrowers with bad credit. So, it’s important to ask about these potential fees up front and to make sure you have enough cash to pay them.
Should You Apply for a Mortgage with Bad Credit?
Even if you can get approved for a mortgage when you have bad credit, it may not be in your best interest. Bad credit mortgage loans not only require higher down payments but also charge higher interest rates and fees.
If you can manage to wait for one to three years, you may end up saving a lot of money by working on improving your credit score. This is especially the case if you’re planning on living in the home for a long time.
Remember: while refinancing down the road is an option, it’s not a cheap one.
Before you decide to apply for a mortgage with bad credit, consider your overall financial picture to decide if it’s a good idea or not.
By taking the emotions out of the equation and looking at the cold hard facts, you can then make the best decision for you and your family.