Tips for Getting a Mortgage with Bad Credit

Tips for Getting a Mortgage with Bad Credit
by: Rachel Jackson



When it comes to applying for a mortgage, good credit is perhaps the best
and most effective tool to have at your disposal. In fact, your credit
rating is so important that many experts say you should make sure your
credit is good before you start applying for mortgages at all.

Your credit rating, while it may be the most important factor, is by no
means the only factor that lenders consider when deciding whether to
grant you a loan. That means it’s still possible to get a mortgage even
if your credit rating is not optimal. So how do you go about this?

Understanding your Credit Rating

The first step to getting a mortgage with bad credit is understanding how
credit scores actually work, and why they affect your ability to get a
mortgage.

Your credit score is based on several different factors, the amount of
available credit you have, how much of the available credit you have
used, the length of your credit history, your employment history, and
whether you pay bills and debt repayments on time. Your credit rating is
a number between 300 and 850, with 850 being the best credit score you
can achieve.

As far as lenders are concerned, anyone with a credit rating of 700 or
more is a “good risk,” meaning someone who is likely to make mortgage
repayments on time every month until the loan has been repaid. Below that
level, lenders consider you are more of a risk in terms of whether or not
you will continue to make payments on time. If your credit score is below
around 620, you’ll find it difficult to get an affordable mortgage, and
below 500, most lenders aren’t willing to offer loans at all.

Repairing Your Bad Credit

So what can you do if you have bad credit? First, know that if you have
bad credit and you want to apply for a mortgage, it’s important to do
whatever you can to repair your credit before you apply. A second
important point is that it can take six months to a year to rebuild bad
credit enough that it will positively affect your ability to get a
mortgage. So it’s also vital that you’re willing to be patient, and take
the time to repair your credit before applying.

Repairing bad credit has two main steps: first, check your credit report
for errors, and second, repairing any damage done.

To check your credit score for errors, simply obtain a copy of your
report from one of the three main credit-reporting agencies – Equifax,
Experian and TransUnion. Examine the report thoroughly, and check for
errors or out-of-date information. Even a single error can reduce your
score by a significant margin, so this is a worthwhile step to take. To
fix the error, call the creditor involved and explain why you think the
item should be removed from your report. Make sure the creditor agrees to
send you a letter verifying that the item was removed, to provide proof
for the credit bureau.

Next, it’s time to start repairing your credit score. The most effective
way to do this is simply to pay your bills on time, and keep your debt
total low, while maintaining a small amount of available credit. Lenders
like to see a fairly small amount of available credit, with a wide gap
between the amount of credit you have, and the amount you actually use.
Another point lenders look for is a long credit history, so if you have
old credit card accounts that are in good standing, keep those open and
active in preference to newer accounts.

Getting a Mortgage with Sub-Optimal Credit

Even if you’ve taken steps to repair your bad credit, it might not be
good enough for lenders to consider you an excellent risk. If your credit
is still below 700, you may find you have to do some serious shopping
around to find a lender willing to accept your application. If you’re
able to make a larger down-payment, this can help off-set the negative
effects of a lower credit score. Other factors that may help include a
good income-to-debt ratio, and a stable employment history.

Lower than 620, you’ll probably be limited to what are known as sub-prime
lenders. These offer loans to people with bad credit and other issues,
but the loans typically have higher interest rates. The problem here is
that if your credit is bad due to tight finances, you’re less likely to
be able to afford the higher repayments that come with the higher
interest rate. If you’re in a situation where a sub-prime mortgage is
your only option, it’s very wise to stop and think about whether it might
be a better option to wait until your credit is higher.

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About The Author
Rachel Jackson is a freelance writer who writes about topics and
pertaining to the mortgage industry such as how to refinance home
mortgage.

http://www.absolutemortgageco.com