By Richard Barrington
Ten tips to make you more attractive for a new home loan - even if you have bad credit
Mortgage Credit Problems Columnist
It's no secret that lending standards have gotten tougher. It's harder to qualify for a new home mortgage loan for just about everyone, not just those with bad credit. It's also more difficult to crack into the top tier of credit scores that would earn you the best loan terms.
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So, should if you have less than perfect credit, should you give up on approaching mortgage lenders? Of course not - but it definitely helps to have a strategy. It may take a little longer to get a mortgage with fair or bad credit, but here are ten things to do to overcome that bad credit and appeal to lenders:
- Make your credit and loan payments on time. The first and most important step toward overcoming credit problems is to change the habits that led to those problems. Think of it this way: credit problems are part of your history, and you need to start writing a new history. You do this by putting together a track record which shows you are now able to consistently meet your financial obligations.
- Understand your credit problems. While you build toward the future, it's important to understand your past. Get a copy of your credit report to see what the problems are. Identify what caused those problems. Were they one-time mistakes? Do they indicate that you live beyond your means from time to time and need to rein in your lifestyle? Or are your credit problems simply a result of poor organization, of not keeping track of your bills and their due dates? The more you understand about what caused your credit problems, the better you'll be able to address them.
- Address mistakes in your credit report. Of course, there may be errors in your credit report, and you'll want to address these immediately. Approach both the credit rating agency and the creditor who reported the error. When you feel you've reached an understanding about what the true history is, be sure this is confirmed in writing.
- Consider the length of your credit history. Part of your problem in qualifying for a mortgage may be that your credit history is not long enough. Time will take care of this to some degree, but use that time to assemble a track record of responsibly handling a combination of installment loans and credit card payments.
- Know when credit problems occurred. If there are genuine problems in your credit history, keep a record of when they occurred. Past credit problems may haunt you for as long as seven to ten years, but they are given especially heavy weight in the first two years. Once your problems are more than two years in the past, you may want to try approaching lenders again.
- Control your credit mix. Again, a mix of installment and credit card debt makes an ideal track record (assuming payments are made on time), but be wary of adding too many credit cards.
- Pay down existing credit balances. Even if you are meeting your minimum monthly payments, carrying credit balances can count against you. Lenders look at how close you are to your credit limit, and that ceiling may have gotten closer--card companies have been slashing credit lines to the bone.
- Strengthen your household income. This may sound like an obvious point--sure, everyone would like to make more money--but in this context it's really a question of timing. If you are due for a raise, or your spouse has been looking for a job, wait until those things come through so you will approach lenders with the strongest income level you can.
- Pick your spots when applying for credit. Even applying for credit can be a red flag, so be selective in applying for only the new credit cards you really need.
- Use online resources to search the widest field of possible lenders. While the general statement that it's tough to get a mortgage with bad credit these days is true, not all lenders have the same standards. Use online resources to see the full range of lenders available. If you get shut out of a mortgage because of bad credit today, use those online resources to check back periodically to monitor changes. You can request up to four free quotes from lenders in our mortgage lender database. It's free and there's absolutely no obligation to you!
If it seems impossible to get a mortgage because of your bad credit, don't give up hope. Just as conditions changed to make lenders more wary of bad credit, there will be a time when lenders become more aggressive again.
Meanwhile, your credit history is not written in stone. It's changing all the time, and with some consistent good habits your credit problems will start to fade into the past. The ten steps listed above will help you make that transition successfully.
Once you feel you're ready to apply for mortgages to see if you will be approved, make sure you shop around and compare lenders - unfortunately no one source will consolidate all mortgage lenders, but if you want to tap into our network of lenders for up to four competing mortgage quotes, fill out our mortgage quote form and see if you can join the hundreds of people we've helped get approved. Good luck!