Credit Score Calculations and Bad Credit

By Gabby Hyman
Mortgage Credit Problems Columnist

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Many people are told that because of their bad credit scores they will have to assume a bad credit mortgage. It may be true. But a lot of misconceptions float around concerning credit reports, what constitutes bad credit, and how bad credit can be repaired. For example, many people believe that paying off a delinquency or increasing their income will automatically boost their credit score. It's simply not so.

The good news is, even if you have a bad credit score, there are lenders who will hook you up with a bad credit mortgage. The bad news is that restoring credit often takes years. Let's have a look at the two major areas that credit reporting agencies examine in calculating your score:
  • Repayment history: Have you paid on time, or have you been slapped with delinquent fees, had property foreclosed, or filed any bankruptcies? Do you have a lengthy credit history, or are you a relatively new borrower?
  • Credit you're using and outstanding debt: This means outstanding mortgage loans, credit card debts, retail accounts, installment loans. It's not always the amount you owe, but if you're spread too thin, it suggests credit risk. Do you constantly open new credit accounts -- meaning that you might be shuffling delinquency between lenders?

How Bad Mortgage Lenders Size Up the Score

Software used by credit reporting agencies gather your data and crunch out a credit score, typically ranging from 340 to 850. Lenders look for 700 or better for offering qualifying loans. Bad mortgage lenders can find you a poor credit home loan with a corresponding interest rate that reflects your credit risk.

Since delinquencies remain on your credit report for up to seven years, you can't expect a speedy turnaround. Bad credit mortgage lenders will determine whether your more-recent credit history shows improvement. Even though increased income won't affect your credit score, lenders see it as a good indication of your ability to pay.

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