Mortgage lending standards tightened after the housing bubble burst and, even as home prices rise, credit qualification requirements are still high for most home loans. Back when home prices were rising at double-digit rates in 2004 and 2005, lenders were more willing to take a risk with borrowers and a whole industry of bad credit mortgage lenders was ready to help you with a poor-credit mortgage. If you have bad credit today, you may find an FHA loan will be available or you can work with a lender to discuss how to improve your chances of qualifying for a bad credit home mortgage.

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Even FHA lenders, though, have raised their standards for borrowers. According to Ellie Mae, the average credit score for an approved FHA purchase loan in 2012 was 700 with a debt-to-income ratio of 41 percent.

The average credit score for a denied FHA loan application for a home purchase was 667, with a debt-to-income ratio of 47 percent.

3 steps to a mortgage approval

If you can overcome your challenges in one area, such as having credit problems, you may still qualify for a home loan. Here are the three main requirements for a loan approval:

  • Credit score. As you can see, even FHA lenders prefer borrowers with a higher credit score than the minimum of 620 or 640. A lender can give you tips on how to improve your credit so that you can eventually qualify for a loan. In addition, if you have paid off debt and have a low debt-to-income ratio or extra cash for a bigger down payment, a lender may approve you now.
  • Debt-to-income ratio. The maximum debt-to-income ratio for most lenders is 41 to 43 percent. The lower your monthly debt obligations in comparison to your gross income, the better, so try to reduce your debt problems and boost your income before applying for a mortgage.
  • Cash. You'll need cash for a down payment of 3.5 percent with an FHA loan and cash for closing costs as well as reserves. The more you have in savings, the better risk you appear to mortgage lenders.

Fill out the form on this page to reach mortgage lenders who can advise you on your individual quest for a home loan.