Qualifying For a Bad Credit Mortgage is About to Get Tougher: What Should You Do?

By MortgageCreditProblems.com Columnist
Mortgage Credit Problems Columnist

If you've been shopping for a mortgage, you know it's harder to qualify than a few years ago. Hold on tight -- it's about to get tougher.

Minimum Credit Scores

Fannie Mae, which buys mortgages buys and sells a very large share of all mortgages written, announced it was raising the minimum credit score requirement for mortgages to 620. The change will go into effect November 1st or December 12th, depending on the type of loan.

Bad Credit? Don't Give Up

That doesn't mean you need to give up on a mortgage if you've got poor credit, but you might need to get your financial house in better order to qualify. Here's what to do:

Know Where You Stand With Lenders

Find out your credit score and review your credit reports to see the information on which your score is based. You can get a free copy of your credit reports from AnnualCreditReport.com and your credit score (for a small fee) from MyFico.com. It's not uncommon for a credit report to contain an error, so contact the credit bureaus and financial institutions supplying the information if you find any mistakes. Fixing just one error could raise your score and qualify you for a mortgage, even if you had a history of bad credit. Don't be complaisant if you think your score is high enough to qualify for a bad credit mortgage. An even higher score will help you qualify for better terms, which saves you money in the long run.

Improve Bad Credit: Pay Your Debt

Do what you can to boost your payments on credit cards to lower your debt-to-income ratio. By lowering credit card balances, you lower the minimum monthly payment. You can also help your ratios by paying loans until there is less than 10 months left on them--at this point, Fannie Mae lenders don't have to count the debt in your ratios, A general rule of thumb in the industry is your monthly mortgage payment, plus any other debt, should be no more than 36% of your monthly gross income.

Watch Your Spending

Don't take on any more debt, pay your bills on time, go on a spending diet and cut expenses. Managing your finances responsibly over time improves your credit score, and watching your spending helps you save money toward a down payment.

Although credit standards are tightening, you can still win the mortgage game by getting to know the playing field, making smart moves financially, and shopping smartly. Fill out the form on this page to get up to four free quotes from home mortgage lenders.

Sources:

http://https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0929.pdf 

http://www.cnbc.com/id/32895347 

http://www.dsnews.com/articles/fannie-mae-raises-lending-criteria-2009-09-28 

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