Bad Credit Mortgage Help: Understanding Your Credit History

By Gil Mackey
Mortgage Credit Problems Columnist

Your credit history is how mortgage lenders consider whether you qualify for a bad credit home loan.

Your Credit History and You

When you apply for a bad credit home loan the first thing your mortgage lender will do is get a copy of your credit report. Understanding your credit history can help you take action to improve your chances for qualifying for your bad credit mortgage.

The most important factors are:

Payment history
How much you owe
Length of your credit history
Type of credit
New credit

Your Payment History

Your mortgage lender will be looking for how many accounts have been paid off, whether you made your payments on time, and if any accounts are delinquent or have gone into collections.

How Much You Owe

While the credit bureaus have no idea of what your income is, they can get a pretty good idea of how well you're doing by the amount of credit available to you versus the amount you are using. For example, you would think that a borrower with a $20,000 line of credit who uses $1,000 of it one month and pays it back the next earns a healthy income and manages finances well. Another borrower who starts with a $20,000 credit line, increases it by $1,000 each month, and only makes the minimum payment is probably not earning enough to support his lifestyle. Their credit scores will reflect this.

The Length of Your Credit History

Your mortgage lender wants to see that you have an extensive history of making payments on time. And if you had a long track record of making timely payments before running into financial difficulties, that history can keep your score high enough to move your application into the "review" pile rather than the "reject" stack. It may also convince FHA underwriters to give borderline borrowers a second look and a chance at a better loan.

Type of Credit Accounts

Most mortgage lenders considering you for a bad credit home loan will look at the type of accounts and how you paid them. Mortgage payment history is weighted highest and impacts your credit scores the most (which is why paying your mortgage on time is so important--being late on a mortgage is considered nearly as bad as a bankruptcy by mortgage lenders), then secured loans like car financing, and finally unsecured loans like credit cards.

New Credit

Have you opened too many new accounts? Have there been a lot of inquiries about your credit recently? This can have a negative impact on qualifying for your bad credit home loan. Inquiries mean you are shopping for additional credit, and could be interpreted to show that you are unable to pay your current obligations. It could also tell a lender that your acceptable debt to income ratio today may be a lot higher tomorrow - a red flag for underwriters. That's why loan officers frequently tell buyers not to shop for cars or furniture before buying their home.

About the Author
Gil Mackey has been a writer and artist for the past twenty years. In addition to freelance writing, Gil writes for his local paper, and lives with his two children in Nevada.

Share This Article: