How to qualify for a bad credit mortgage

By Michele Lerner
Mortgage Credit Problems Columnist

Even with the burden of a low credit score, some consumers are able to qualify for a bad credit mortgage. If you are interested in buying a home but have poor credit, there are several steps you can take to improve your chances of earning a loan approval.

  1. Start by entering basic information online to see where you stand with mortgage lenders. Bad credit mortgage lenders are in business to assist consumers who want to buy a home but may not qualify for a traditional loan.
  2. Evaluate your own finances so that you can share your understanding with a bad credit mortgage lender. Just because you need to apply for a poor credit mortgage does not mean you have necessarily been irresponsible. If your credit problems stem from a period of unemployment or illness or from a divorce, be prepared to share that information.
  3. Make sure you know how much you can afford to spend on your housing payments and have enough savings in the bank for cash reserves as well as a down payment and closing costs. A lender will look more favorably on potential borrowers who have been working to improve their financial situation, even if they have low credit scores.
  4. Request your free credit report at AnnualCreditReport.com and review it for mistakes. Remember that some negative entries such as bankruptcy or a judgment or collection will stay on your report for years, but the impact of these items fades over time.
  5. Meet with a lender or a non-profit credit counselor to discuss ways to resolve your credit problems. These professionals can advise you on an individual basis about the best way to boost your score.
  6. Ask about an FHA loan if your score is 580 or above. Lenders are more lenient on credit score standards for an FHA loan, and the down payment requirement is just 3.5 percent of the home's value.
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Remember that a lower credit score makes you a higher risk for lenders. If you need a bad credit home mortgage, the home loan will likely come with higher fees and a higher interest rate than a standard loan. However, your credit problems won't last forever, so if you diligently improve your finances and raise your credit score, you may be able to refinance into a traditional home loan in the future.

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