How to Get a Mortgage With Bad Credit in 4 Simple Steps

August 7, 2019

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Getting approved for a mortgage can seem overwhelming, particularly if you have poor credit. There are many steps to the process and you’ll have to take time to hunt down the best loan option for you.

One way to relieve the stress is to understand what you have to do to get a mortgage. There are 4 simple steps you can take to get a mortgage with bad credit:

  1. Save for a larger down payment
  2. Get pre-approved
  3. Shop qualifying loans for bad credit
  4. Work to improve your credit

1. Save For a Larger Down Payment

While you’re working on improving your credit, you’ll also want to come up with a plan to save for a down payment. A typical home buyer would put down a 20% down payment. However, there are loans that don’t require this.

If you have bad credit, you may have to put more money down in order to qualify for a mortgage loan. Not only will you end up borrowing less, but it can help you save on interest in the long run.

If you want to save for a down payment, give yourself time. Find ways to put aside money when you start thinking about getting a mortgage or pick up a side hustle to help you do this.

2. Get Pre-Approved

Once your credit is where you want it to be and you’ve saved up for a down payment, it’s time to start shopping for a mortgage loan.

Getting pre-approved for mortgage loans is an ideal place to start, even before you start shopping for a home. A pre-approval is when you get approved for a mortgage loan before you place an offer on a home.

It lets you know how much money you can borrow and makes it easier to place an offer on a home when the time comes. Sellers also prefer to sell to homebuyers who have been preapproved.

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Pre-Approval for a Mortgage Loan:

  • Tells you how much you can borrow before placing an offer
  • 14-day window to shop for loans
  • More options to compare offers

Once you’re pre-approved for a mortgage, you have a certain amount of time to shop for a home before the pre-approval expires. Just keep in mind that every time you apply for a loan, the lender will run your credit, which will cause hard inquiries to approve on your credit reports.

You do have a 14-day window to shop around for loans without the applications counting as multiple inquiries. It will only count as one inquiry and won’t hurt your credit as much. This is because the credit bureaus understand you’re shopping for the best deal possible. This gives you a chance to compare offers from different lenders.

When choosing a lender, be sure to look at interest rates, the amount they’re authorizing you to borrow, and the terms of the loan to make sure you’re making the best decision possible for your finances.

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Lexington Law has helped clients work towards fair and accurate credit scores by leveraging their rights. We’ve helped hundreds of thousands of clients remove unfair, inaccurate and unverified accounts from their credit reports.

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3. Shop Loans for People With Bad Credit

There are many types of mortgages to choose from. Consider whether to apply for a conventional home loan or a government-backed loan.

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The Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) are backed by the government and have less strict credit requirements. You will also not have a down payment obligation.

FHA Loans for Bad Credit

FHA loans are given by FHA approved banks and mortgage lenders. They are guaranteed by the government, which means lenders are more willing to lend to bad-credit borrowers. FHA loans typically have:

  • Low down payments
  • Low closing costs
  • Easier credit qualifications

You can qualify for a 10% down payment with a credit score of 500. If your score is higher, you can put even less down.

Just remember that with an FHA loan, you do have to get private mortgage insurance, which can add to the expenses of buying a home.

VA Loans for Bad Credit

VA-approved lenders provide mortgages for military service members, veterans, and their spouses. You need to have valid proof of your service history to apply. With a federal backing on the loan, VA loans offer:

  • No down payment
  • Low credit qualifications
  • Low closing costs
  • No minimum credit score

Conventional Mortgage Loans

Conventional mortgage loans come from banks and credit unions (and are not government-backed). Credit unions, mortgage lenders and community banks are more willing to help home buyers with a poor or bad credit score.

If you already have a good relationship with your bank or credit union, you may want to start there to apply for a mortgage. They may work with you on the interest rate and loan amount.

You should also decide just how long you would like to have your mortgage loan out. Mortgage loans come with 15, 20, and 30-year terms. If you opt for a shorter-term loan, then your monthly payments will be higher but you will likely save on interest.

The term of your loan will depend on your unique finances and budget. Use a mortgage calculator to help you determine how much you can save.

4. Work to Improve Your Credit

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The first step to getting improved for a mortgage is to improve your credit:

  • Check your credit score and credit report: This will give you an idea of how lenders view you and what interest rates you may qualify for. If your score is low, you can go through your reports to see how you can improve your credit score to qualify for a better interest rate. You can access your credit reports for free once every twelve months from the three major credit bureaus.
  • Dispute any credit report errors: Going through your credit reports will help you know if there are any errors. About 20% of Americans have errors on their credit reports. These errors can make the difference between qualifying for better interest rates. If you have errors, take the time to dispute them.
  • Keep utilization ratio below 30 percent: A utilization ratio over 30% can hurt your credit. Lenders may be less willing to approve you for your mortgage loan. If possible, it’s a good idea to pay down the balances on your revolving accounts. This is also a way to raise your credit score.
  • Keep debt-to-income ratio low: Ideally, it should be 43% or less. Your debt-to-income ratio is how much debt you have measured against your income. Having a high debt-to-income ratio is an indicator to lenders that you can’t handle the additional mortgage debt. This is where paying down your credit card balances can help you.

Remember that it takes time to fix your credit. You can’t expect it to be fixed overnight. If you know you plan on getting a mortgage, make sure you give yourself plenty of time to do this.

Improving your credit, saving money, getting pre-approved, and understanding the different types of mortgage loans are all things that can help you qualify for a mortgage loan. Keep in mind that this process takes time. If you know you want to buy a house in a year, then now may be the time to get started.

If you have bad credit and want to buy a home, contact the credit specialists at Lexington Law Firm. We’ve helped hundreds of thousands of clients for over a decade remove millions of inaccurate, unfair, and unverified negative items from their credit reports. Call now for a free credit consultation. Don’t let bad credit stand in the way of your dream of owning a home.

Improve your report, improve your interest rate. Call for a free consultation

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