Simply put, getting a mortgage with bad or even no credit is a challenge, but it doesn’t have to be. With the right help, you can take control of your financial health by improving your credit and getting the best mortgage rates you.
What do Mortgage Lenders Look For?
When you apply for a mortgage, lenders will begin by looking at your credit file. A credit file is a collection of all your raw credit data that is collected by a credit bureau. This data will be sorted into a credit report, which in turn will be used to generate your credit score.
Your credit history and credit score are used by potential creditors to learn how you may handle your future obligations. The score will indicate:
- How much credit you have utilized
- How much credit you have available
- How you have handled your debt-related obligations so far
Put simply, your credit history and credit score help determine how risky giving you a loan may be. This will affect whether or not you receive a loan and its terms.
The good news: you can get a mortgage with bad credit
The bad news: you’ll almost certainly pay more than a borrower with better credit
What is a bad credit score?
What is a good credit score and what is a bad credit score? Every lender applies their own set of standards when evaluating credit scores. However, there is a generalized scale that you can use to determine your own score’s standing:
Click to explore our what is a good credit score infographic!
It’s important to remember that while your credit score is a major factor in a lender’s decision to approve a mortgage loan, it’s not the only one. For example, if a person applies for a mortgage loan with a 750 credit score but has a high amount of debt, they may not be approved.
You should also keep in mind that having no credit or an insufficient credit file is different than having bad credit. Without a credit history to score, many lenders can use alternative credit such as your cell phone payments, utility payment history, or rent payment history to determine if they can approve you for a loan.
Tips for Getting a Mortgage with Bad Credit
When you apply for a mortgage, the lender will evaluate your entire financial picture. If you can make a strong showing in other areas of the application, your bad credit may be offset by factors:
There are also several types of home loans for those with bad credit including:
- Private loans
- FHA loans
- USDA loans
- Mortgage loan programs through the Federal Housing Finance Agency
How to Improve Your Credit Score Before Applying
Getting a mortgage with bad credit or poor credit is a highly attainable goal. Whether you’re facing a rocky credit history or a non-existent one, there are several ways to fix your credit to get on a brighter financial path.
Begin by addressing your credit issues. Obtain copies of your credit reports from all three credit bureaus to become familiar with the data they contain. If you’re not sure how, you can take a free personal class on obtaining and understanding your credit report.
Next, review your reports for accuracy and dispute any discrepancies. Credit counseling can help you to better understand your credit profile and make sense of your unique financial situation.
Once you’ve become familiar with your credit situation, take steps to start improving your credit. If you struggle with high debt levels and collections, begin a payment plan to start paying them off. Establishing a better payment history will improve your score steadily over time. In fact, it may jump to a higher tier in just a matter of months.
And if you simply don’t have a robust credit history, some of the ways you can begin to build once include:
- Taking out a credit-builder loan
- Financing a purchase
- Applying for a secured bank card.
Credit.org specializes in helping you take control of your credit and reaching your financial targets. Our debt coaches are trained to help you with personalized advice on debt reduction and financial decisions.
Getting a mortgage with bad credit is not impossible, but it could cost more. Efforts you make now to improve your standing could pay off with better loan terms when you are ready to buy.
Take advantage of free credit coaching for help identifying your financial priorities and roadmap to achieve your goals – from purchasing a home to stress-free financial living.