Getting Approved for a Home Loan with Bad Credit

If you're considering buying a home, your first step is to find out what you can qualify for. If you have bad credit or poor credit, here are some steps to get you on the right path for repairing your credit and getting approved for a home loan.

1) Check your credit rating before shopping for a home loan. Your credit may not be as bad as you think. A score under 620 is considered a very bad credit score. A score above 620 but below 680 is not ideal, but it is not so low as to keep you from getting a home loan. You can get a free credit report once a year through www.freecreditreport.com.
             

2) Go over your report and pay off any accounts or make payment arrangements for accounts that are over due and particularly any accounts over 60 days past due. Oftentimes, collection agencies will work with you to reduce the balance by deducting interest accrued which can sometimes cut your bill by 30%- 50%, so it's always worth asking. Take the time to raise your credit score by paying off some credit cards and making your accounts current. If your credit score is under 620, this is the only option to help you get an affordable home loan.

 

3) Create a budget to determine how much you can afford to pay for your monthly mortgage payment once you have improved your credit rating. If you have significant amounts of debt, there may not be any extra money to put toward a home loan. A good rule of thumb, is to keep three credit cards and reduce the balance on each card so that you only owe 10% of revolving debt. This will help boost your credit score by lowering your debt to income ratio.
              

4) Collect the money for a down payment over 20% of the purchase price. The more money you can put down on your home, the more favorable your home loan terms will be, in spite of your low credit score. A large down payment shows the lender that you have some financial responsibility and lowers your monthly payment amount.
              

5) Prepare yourself to have a high interest rate on your loan. This is the penalty for having a low credit rating. You can counter this somewhat with a larger down payment on your home.
             

6) Keep careful track of the closing costs, points, penalties and fees on any loans you are offered. This will protect you from the dangers of the subprime lending market.
             

7) Consider having someone co-sign for the loan with you if you have extremely poor credit. Your spouse or parent, for example, may be willing to sign for the loan with you, and their good credit score may help partially offset your score.
             

8)Avoid the temptation to get an adjustable rate mortgage (ARM). These have lower monthly payments at the beginning of the loan, but the payment amount increases when the national mortgage rate increases. This means your mortgage could end up being much more than you can afford in a few years. People are often tempted by the lower payments that end after about three years and when they payment rises dramatically, you may find yourself needing to sell or face foreclosure.

             

9) Choose a loan with a fixed interest rate that has fair fees and the lowest interest rate possible for your situation. Keep the information on the other loans available in case you are denied for your first choice.

10) Some great options to consider are HUD homes, short sales, foreclosures, and if you served in the military you may qualify for a VA/ Cal-vet loan. Contact HomeServices Lending at (858) 436-3483 for more information about financing the home of your dreams.