(Updated: February 16, 2018. This article is updated regularly to reflect current mortgage information and rates.)
As of Feb. 16, 2018, mortgage rates continue to climb. Currently, the average 30-year fixed rate mortgage is 4.38, its highest level since April 2014. The average 15-year mortgage is 3.84 percent up from 3.35 percent last year this time, according to Freddie Mac’s Primary Mortgage Market Survey.
Even though it’s been several years since the housing threw a wrench into the mortgage lending industry, banks and lenders continue to scrutinize even the best credit applicants. Your credit rating may be the single most important piece of financial information you have to obtain a mortgage loan.
But don’t let bad credit prohibit you from taking advantage of lower than average mortgage interest rates. Considering 30-year mortgages have averaged more than 8% over the past 45 years; they are still historically low in comparison.
Getting approved for a mortgage loan with less than perfect credit is not impossible but it will take some work.
Here are several tips to get approved for mortgage loan with bad credit:
1. Get credit scores first. Review your scores from Experian, TransUnion and Equifax before approaching a lender. While the credit scores you pull may not be the same as the ones the lender pulls, they should be fairly close. Knowing your credit scores will allow you to correct issues that may be keeping them low. Lenders will pull your credit scores from the 3 major credit bureaus and go with the middle credit score. MyFICO.com will give you the most accurate credit scores.
2. Improve Your Approval Chances. Pay your monthly obligations, even utility bills on time. Making regular, timely payments is a quick way to rebuild your credit scores and show you manage credit well. Make sure you have a major credit card reporting monthly.
3. Show Steady Employment and Income. Lenders like to see a steady income. Getting a bad credit mortgage can be made simpler with a stable and steady work history. You should be on the job 2 or more years. If you are self-employed you must be able to show good financial statements for 2 or more years.
4. Bank Statements. Whether you earn a salary, are a wage earner or self-employed be prepared to provide bank statements showing regular deposits and a savings account. Some lenders may require up to 12 months of bank statements. Try to avoid excessive overdrafts and negative account balances. Be prepared to explain any negative information to the mortgage lender.
5. Save a down payment. A low credit score will matter less the higher your down payment. At least a 10% down payment may be required for most loans, unless you go with an FHA, VA or USDA mortgage loan. Putting a substantial down payment like 20 percent or more helps lenders view you as a low risk applicant. It’s all about the level of risk a lender must take on; the lower the risk, the better chance of getting approved.
6. FHA loans. An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (FHA) and is typically one of the easiest types of mortgage loans to qualify for. Credit score guidelines can go as low as 500 even though most major banks set their own guidelines requiring a minimum credit score of 620. Another advantage of an FHA loan is that a lower down payment of 3.5 percent minimum is acceptable. People who have low credit scores, have undergone a bankruptcy or have been foreclosed upon may still be able to qualify for an FHA loan. Find a list of FHA approved lenders at: HUD Lender List.
7. VA loans. To qualify for VA financing the guidelines say you can have credit scores as low as 500. However, most large banks do not honor that guideline and require a minimum credit score of 620. If your credit score is lower you can work with a qualified mortgage broker to help you find a lender or find a VA-approved lender at: Regional Loan Center Contact Information.
8. USDA loans. USDA Home Loans are primarily used to help low-income individuals. These loans allow up to 102% financing for a home purchase, or refinancing in a USDA designated rural area. USDA loans are guaranteed by the United States Department of Agriculture and must meet guideline requirements. Home loan eligibility is based primarily on income with easy qualifying for lower credit scores. Work with a mortgage broker to locate a USDA lender or find a USDA lender at: Approved & Eligible Lenders.
9. Down Payment Assistance Programs. There are down payment assistance programs and first-time home buyer programs in every state. This could be a great option if you are in the income qualifying range. Check-out some down payment assistance programs in your state.
10. Manage Debt. Avoid late payments, continue to pay your bills on time and avoid charging over 30% of your available credit limit on your accounts. Lower balances on your credit accounts compared to the amount of credit you have available will not only improve your credit score, it will show lenders you practice good credit management. A bad credit mortgage will be much easier to obtain if all of your obligations are being managed and paid on time.
11. Get quotes from multiple lenders. When seeking a mortgage loan you must shop around to get the best rate. The credit scoring model makes allowances for consumers shopping for a mortgage. The FICO scoring model will not penalize you for having multiple mortgage loan inquiries if they are done within a 14-day time-span. The newer versions of the credit scoring model, FICO 8, count the shopping period as any 45-day span, unfortunately not many lenders are using the newer version.
12. Consider using a mortgage broker. Mortgage brokers often have access to many lenders and programs that can help you obtain a bad credit mortgage loan. The key is finding a reputable broker with good references. Don’t be afraid to request references and never hesitate to research a mortgage broker through your State’s Licensing Board (Usually the Department of Real Estate). If using a mortgage broker, be prepared to pay a commission but remember that fees and commissions are negotiable.
13. Rapid Re-score your Credit Files. Rapid Re-score is a service offered by a lender or mortgage broker in which your credit scores can be re-analyzed and quickly corrected for the purposes of a mortgage loan. Rapid Re-score accelerates the dispute process, corrects negative information and increases your credit score immediately. This is an invaluable service as one error could potentially make the difference in whether or not you can obtain a mortgage loan