You've saved money for a down payment on a house, paid down your credit card debt, corrected any errors on your credit report, and have a pretty good idea of your credit score. Now you're ready to go house hunting, right?
Now it's time to speak to some mortgage lenders about your options for a home loan and the price range that you can afford. There's no use shopping for homes that you'll never be able to buy. As a starting point, enter your information on the form on this page to get up to four free quotes from lenders.
Bad Credit Mortgage Options
As you talk to lenders, get information about different types of loans available. Pre-qualifying for a mortgage involves the lender calculating how much you can borrow, given your income and down payment. The general rule of thumb is that your housing costs, which include mortgage payment, real estate taxes and homeowners insurance, shouldn't much exceed 30% of your gross monthly income, and all your monthly debt service should be no more than 38-42% of your gross monthly income.
Keep in mind lenders charge higher interest rates if you have bad credit than they would for someone with perfect credit. The higher rate impacts your monthly mortgage payment and how much you can borrow, so it's a good idea to let the lender know your credit score upfront so you can get a good ballpark quote.
Poor Credit Home Loans: Prequalifying Versus Preapproval
Don't confuse prequalifying with preapproval. Prequalifying gives you an idea of how much you can borrow, but it's not a guarantee that you'll get the loan.
Preapproval means the lender has checked your income and credit and approved you for a loan of up to a certain amount. You get a preapproval letter from the lender, which will let you know exactly how much you can borrow and show real estate agents that you're a credible buyer.
Wait to get preapproved until you're serious about buying. Any time you apply for a loan, lenders request copies of your credit reports, which can ding your credit score. One inquiry won't make a huge impact, but a few inquiries for credit, whether for credit card accounts or car loans, add up, so it's a good idea not to apply for credit until you're ready.