How To Get A Mortgage With Bad Credit

Lyn Ridley - 2020-09-08T21:00:00.000Z

Buying a home is a milestone for every family - but financing a real estate purchase can be difficult when your credit score isn’t in the 700s.

If you’ve applied for a mortgage in the past and didn’t qualify, you have a reason to be disappointed - but here’s some good news. There are ways to improve your credit and raise your chances of being approved.

We’ll cover some bad credit financing strategies in this article to help you maximize your chances of success.

Save Up And Try To Make A Large Down Payment

Your credit score isn’t the only factor that affects your chances of being approved for a mortgage. The amount you’re planning to borrow, and the percentage of your new home’s value that it represents, are equally important.

A substantial downpayment (more than 10% of your home’s value) will help strengthen your mortgage application. You may also qualify for a lower APR and won’t have to apply for private mortgage insurance (PMI).
Saving a substantial sum of money like this - which would come to $20,000 or more on a $200,000 home - may seem daunting. Yet, if you free up some cash in your monthly budget and save consistently over a year or two, you could accumulate the funds you need.

Check If You're Eligible For Down Payment Assistance

If you’re applying for an FHA mortgage and don’t have the required deposit, you may be able to apply for a special grant or loan. These assistance packages are available to first time home buyers and families that have income that falls below a certain threshold.

The support you receive may take the form of a one-off grant or a low-interest or interest-free loan. You may also be able to apply for a deferred loan with no interest that only comes due if you choose to sell your home one day.
If your current budget doesn’t allow you to save very much each month, you may not be able to come up with the 10%-20% required to secure a regular mortgage. Down payment assistance can help you on the path to homeownership.

Check Out First-Time Buyer Programs

If this is your first home purchase you may be able to benefit from some of the incentives and assistance programs that your state has on offer for first-time mortgage applicants.

The FHA, USDA, VA, and Good Neighbor Next Door programs are just some of the options you can explore when buying your first home. They’re suitable for low credit buyers, rural real estate buyers, veterans, and professionals like firefighters and school teachers respectively.
Fannie Mae and Freddie Mac are two of the biggest lenders in the US and they both offer incentives for families purchasing their first home. Note that these are ideal choices if your credit is good but you haven’t saved up a substantial deposit yet.

Find A Cosigner

If you’re having challenges getting approved for a mortgage due to your credit score it may be a good idea to ask someone to cosign for you. This strategy comes with several pros and cons that you’ll want to bear in mind.

Advantages

You’ll benefit from your cosigner’s good credit score: Their signature on your application can boost your chances of approval.
It won’t cost you anything: All you’ll need to do is find someone who trusts you and is willing to secure your mortgage.

Disadvantages

It can strain your relationship: The person who cosigns on your mortgage is accepting joint liability for it. If you don’t make your payments they will have to pay on your behalf or risk having their credit score drop.

Don't Open A New Credit Card

In the months leading up to your application, it’s best not to apply for any other types of credit. This can cause your credit score to drop and reduce your chances of being approved.

New credit applications count 10% toward your FICO score. You’ll want to keep these to a minimum to prevent your numbers from dropping.

Try Rapid Rescore

Improving your credit score is a great strategy - but if your lender is using outdated credit data you won’t benefit from your improved numbers.

A rapid rescore is a request you make of your bank or credit union. They’ll pull your latest credit score from the three main bureaus and update your credit score on their system.
If you’ve taken measures to improve your credit recently this could help your mortgage application as the latest version of your score will be used.

Conclusion

Buying a home is something every family dreams of - and there’s no reason why bad credit should stop you from doing so.

Saving for a down payment, getting down payment assistance, enrolling in a first-time buyer program, and finding a cosigner with good credit are all excellent ways of improving your likelihood of mortgage approval.