Getting a home loan with bad credit can be a daunting task. Since approving a mortgage requires a lender to take on a certain level of risk as part of the loan arrangement, many lenders place a great deal of emphasis on credit scores and the level of financial responsibility documented in credit reports. Fortunately, buying a home with bad credit is not impossible, especially if you have established a few good credit references since the issues that damaged your credit rating, currently owe very little money in comparison to your income, and can provide a sizable down payment on the home.
When buying a home with bad credit, it is important to look closely at the relationship between your monthly income and the amount of debt you currently carry. Lenders will look closely at your ability to successfully honor those current debts along with a mortgage payment. If they have concerns about that ability, chances are your mortgage application will be rejected. At the same time, if lenders look over your credit report and see that you are consistently meeting your obligations without late payments and are actually reducing your debt over time, they are much more likely to approve the application.
Taking the time to review and correct any issues with your credit reports is also important if you are thinking of buying a home with bad credit. Since there is no real way to know if the lender will look at one, two, or all three reports provided by the major credit reporting agencies, ordering copies and then taking steps to have old information updated and entries that are not related to you removed makes it easier for the lender to get a true picture of your past and current financial situation. Keep in mind some items may be accurate on one report, but incorrect on others, so don’t assume that reviewing and correcting one report will automatically mean the other two are also updated.
Retiring past due debts is also important for anyone looking into buying a home with bad credit. While you may have been late or even defaulted on certain debts, eventually paying off those debts will have some impact on how lenders perceive the risk of approving the loan application. At the time the mortgage application is submitted, make sure your older obligations are settled and that any new credit cards or car loans you’ve entered into since the financial difficulties are also up to date. The ability to see an established pattern of remaining current on obligations for the last year or so can make the difference between financing a home and being rejected.
One strategy to use when buying a home with bad credit is providing a substantial down payment as part of the purchase process. Although not everyone is able to do this, doing so means that the lender is asked to finance a mortgage that is for far less than the property held as collateral is actually worth. This helps to reduce the risk assumed by the lender, since even if in the event of a loan default, the property can be sold and the entire balance due on the loan retired with relative ease. As a bonus, the higher down payment will also translate into lower monthly installment payments for you, a factor that may also increase the lender’s belief in your ability to make the payments on time.