The population of the United States is around 300,000,000 people. Why is this important in the discussion of how to get a mortgage with bad credit? Bad credit is embarrassing! It helps to know that of the 300,000,000 people in the USA, 110,000,000 of them have suffered bad credit. Yes, that’s around one third of the population! There isn’t any reason to feel overwhelmed by bad credit in today’s society. In fact, the sheer number of people with bad credit actually works in your favor. If you’re searching for how to get approved for a mortgage with bad credit, you’ll find there are hundreds of options – if there wasn’t, around 110,000,000 Americans would be unable to buy a home. As such the credit industry has had to make allowances.
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So how do you get a mortgage with bad credit history? Just doing a simple search on the Internet will garner hundreds of lenders willing to accept your application. But there are implications to applying to different lenders, not the least of which is your credit score being lowered further. In order to get a mortgage loan with bad credit, there are some guidelines to follow.
1. Get a credit report, and not the free kind! Your credit report reveals a lot about your credit history, some even incorrect. The free kind gives you all the information about your debt history, but a paid version includes a FICO score. The FICO score is the magic number that accounts for some 80-90% of the mortgage loan decision.
The scores range from 350 (awful/terribad) to 950 (superduperawesome). If your score is 350-499, you’re better off moving home with mom, rather than getting a mortgage loan. Even at 500-619, your credit score is so poor you can end up with $200,000 extra interest paid.
Knowing your credit score will allow you to visit lender websites and see what you’ll qualify for in terms of their interest rates. Most lenders have this information prominently displayed (and most of the time it’s a scary thought to get a home loan with 20% interest rates).
2. Review your credit report for errors. If you find erroneous entries, follow the instructions with the reporting agency to dispute the transaction. Every entry affects your credit in a different way. Removing even one bad credit entry can raise your credit score 50 points (lowering the bad credit interest offering by as much as .05%, which can be $50,000 in interest).
3. Configure you debt to income ratio. Excluding utilities, create a ratio of your total monthly debt divided by your total gross monthly income. If this figure is above 36%, you’re in the nono area of credit risks. Ideally you want this score to be around 28%. Pay off and close low limit credit cards, wait to apply for a mortgage loan until you have a chance to reduce your debt to income ratio.
4. Learn about the different types of loans and which are beneficial in your situation. Check into the terms “ARM” “FIXED INTEREST RATES” and other terminology. There are literally hundreds of ways a mortgage loan can work and sometimes getting a bad credit mortgage loan will be approved with only fixed or ARM rates. Each lender has their own standards.
Understanding how to get a mortgage loan with bad credit will, I hope, make you consider repairing your credit before the application process begins. Repairing credit is fairly easy and very productive. A year of secured card payments may save you thousands of dollars, as will reducing your debt to income ratio.