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.
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.
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