When you’re buying a home, your credit score is one of the most important factors that lenders consider, both when determining your eligibility and when setting your interest rate. Though it’s difficult to get a mortgage with bad credit, it’s not impossible. In fact, some mortgage types specifically cater to borrowers with🎉 less-than-ideal credit. When you’re shopping for a home with bad credit, there are a few steps you can take to improve your chances of approval, including adjusting your budget and finding a co-signer

What Lenders Look For

When you apply for a mortgage, there are several key factors lenders look at during the 澳洲幸运5官方开奖结果体彩网:underwriting process to determine if you’re a 澳洲幸运5官方开奖结果体彩网:good candidate for a loan. While each lender and loan type may have its own requirements, you can exp🎶ect these factorsꦛ to be important in all cases. 

Your credit score is, of course, one of the primary factors. It provides an indicator of your ability to repay your loan, in addition to your likelihood of actually doing so. The better your credit score, the more confident lenders will be in your ability to repay your loan, and vice versa.

Here are a few other impo𝔉rtant factors lenders consider.

• Income: Lenders require that you have a stable and reliable source of income to qualify for a mortgage. Generally, you’ll need to show at least two years of consistent income history and provide documentation such as pay stubs, W-2s, and tax returns.
• Debt-to-income (DTI) ratio: Lenders will calculate your 澳洲幸运5官方开奖结果体彩网:debt-to-income (DTI) ratio, which is your total debt payments relative to your gross income. Your DTI is expressed as a percentage, and the higher it is, the more of your money goes toward debt. While some loan types allow DTIs up to 50%, a general guideline is to keep your back-end DTI—which includes your housing payment and all other debt—below 36%.
• Loan-to-value (LTV) ratio: The 澳洲幸运5官方开奖结果体彩网:loan-to-value (LTV) ratio refers to the percentage of your home’s purchase price that is financed. For example, if you buy a property worth $200,000 and your down payment is $10,000, then your LTV is 95%. Each loan type has a different maximum LTV, so it’s important to be prepared based on the type of loan you want.
• Assets: When you apply for a loan, your lender will ask for proof of your assets. First, they want to ensure you have enough money for a down payment. They also want to assess any 澳洲幸运5官方开奖结果体彩网:cash reserves, meaning money you can easily access after you buy your home. Having cash reserves shows a lender you may have a greater ability to continue your mortgage payments in a financial emergency.

How to Get a Mortgage With Bad Credit

The mortgage process varies slightly depending on your lender an♐d loan type. Additionally, borrowers with bad credit may have to🎉 go through a more in-depth underwriting process. However, nearly all loans follow this simple step-by-step process.

1. Preparation: During the preparation phase, you’ll get your finances in order. This could include saving for a down payment, boosting your credit score, setting a home budget, and more.
2. Pre-approval: Before making an offer on a home, it’s advisable to get pre-approved. First, pre-approval is a way to determine whether you’ll actually qualify for a loan, which is especially important if you have bad credit. Additionally, a pre-approval letter can increase your chances of your offer being accepted.
3. Application: Once your offer on a home has been accepted, you’ll complete your loan application. This application is more in-depth than the one you had to complete to get pre-approved.
4. Underwriting: The underwriting process is when your lender reviews your loan application in depth. You’ll be required to provide various financial documents to help your lender determine whether you should be approved for a loan. The underwriting process may be more extensive if you have bad credit.
5. Closing: The closing is the final step of any home purchase. It’s when you’ll officially sign the papers for your loan, pay your down payment and closing costs, and take ownership of your new home.

Because home-buying may be more complicate🥃d when you have bad credit, there are some additional steps you can take to increase your chances of approval.

Review Your Credit

It’s important to know your credit score and exactly what’s on 澳洲幸运5官方开奖结果体彩网:your credit report. 

Reviewing your credit is essential for 🐼several reasons. First, knowing your credit score can help you identify which loan types you may be eli♔gible for and what compensating factors you may need in place—such as a higher down payment or lower DTI—to qualify.

Additionally, reviewing your credit report🎃 ahead of time can help you find any quick fixes that could increase your chances of apprꦗoval. For example, are there any errors on your credit report that may be lowering your score? Are there any delinquent accounts that you could quickly repair to boost your score?

Adjust Your Budget

If you’re applyi𒆙ng for a mortgage with bad credit, you may need to adjust other♊ metrics to improve your chances of being approved.

One change you can easily make is adjusting y𒆙our house budget. The lower your monthly housing payment, the lower your DTI. And a lower DTI could make it easier to qualify with your current credit score. Additionally, a more affordable home may allow you to make a larger down payment, which will reduce both your LTV and your monthly payment.

Find a Co-Signer

If your credit score isn’t sufficient to qualify on your own, you could improve your chances by applying with a co-signer or co-borrower. 

Generally, a co-borrower is someone who would purchase the home with you and would be listed jointly on both the loan and the title. A co-signer, on the other hand, is someone who agrees to take responsibility for the loanℱ if you can’t repay it. Technically, both a co-borrower and co-signer have the same financial ꦬresponsibility, but whether you use a co-signer or a co-borrower can affect who owns the property.

Traditionally, lenders have used the lowest credit score on the application to determine eligibility. In other words, if one person’s credit score is high enough to qualify and the other’s isn’t, the application is denied. However, in some cases, a lender may take an average of the two borrowers’ credit scores to make it easier to qualify.

Finally, if you🥃’re considering using a co-signer for you🌜r mortgage, only do so if you’re certain you’ll be able to repay the loan. If you have late or missed payments—or worse, default on your loan—you’ll negatively impact your co-signer’s credit as well as your own.

Compare the Best Mortgage Le꧒nders for Bad Credit

Explore Mortgage Loans for Bad Credit

Certain loan types are eas🐈ier to qualify for with bad credit. Requirements vary both by loan type anﷺd by lender, so you may increase your chances of approval by consulting with multiple lenders. Here are some loans to consider with bad credit:

• Conventional conforming loan: Conventional loans generally require credit scores of at least 620, meaning they may not be appropriate for borrowers with bad credit. An exception would be if you’re applying with a co-borrower with good credit and your lender can use an average credit score.
• FHA loan: The Federal Housing Administration insures 澳洲幸运5官方开奖结果体彩网:FHA loans, allowing lenders to accept borrowers with bad credit. You may qualify for an FHA loan with a credit score as low as 500 with the maximum down payment and 580 with a lower down payment.
• VA loan: VA loans are designed to help current and former military members access homeownership. The United States Department of Veterans Affairs doesn’t set a minimum credit score, but individual lenders can. Many lenders have a minimum score of 620.
• USDA loan: 澳洲幸运5官方开奖结果体彩网:USDA loans are designed to help low-income borrowers buy homes in rural areas. Like VA loans, they don't require a minimum credit score, though many lenders still require scores of at least 620.

An FHA loan♊ can cater to borrowers with poor credit, but that doesn’t mean the other loan types are out of reach. Neither VA loans nor USDA loans have of🎃ficial minimum credit scores. While many lenders still prefer credit scores of at least 620, there are likely lenders that will accept borrowers with lower scores.

Improve Your Credit Before Buying a House

Though you may be eager to buy your first home, the best option is often to wait until ꦦyou can improve you𓄧r credit score. Not only will a better credit score make it easier to qualify for your loan, but it will also reduce the overall cost of your loan, as a result of a lower interest rate.

You can take several steps to improve your credit score. Here are a few:

• Check your credit report for errors: A recent study from Consumer Reports found that nearly half of consumers have errors on their credit reports. Depending on the type of error, this could harm your credit score. Start by checking your credit report and disputing any errors with the credit bureaus to have them removed.
• Set up automatic bill pay: Your payment history is the single most important factor in your credit score calculation. If you’ve struggled to make on-time payments in the past, consider setting up automatic bill pay to ensure you never miss a payment again.
• Reduce your debt balance: Lower debt balances, especially on revolving debt, can improve your credit score because they lower your 澳洲幸运5官方开奖结果体彩网:credit utilization. It’s especially important to pay down your high-interest debt, as it’s the most expensive.
• Increase your credit limits: In addition to reducing your debt, you can improve your credit utilization by increasing your credit limits. Keep in mind that while this may improve your credit score, it doesn’t necessarily affect your ability to repay your loan.
• Keep your credit accounts open: When repairing credit, you may be tempted to close old credit card accounts, especially if you’ve recently paid them off. However, maintaining these open accounts on your credit report can improve your credit score as it increases your age of credit. Closing these accounts could lower your score.
• Become an authorized user: A quick way to improve your credit score is to 澳洲幸运5官方开奖结果体彩网:become an authorized user on someone else’s credit card—preferably on an account with a long, positive payment history and low credit utilization. You’ll essentially get credit for their responsible credit card usage.

The Bottom Line

A bad credit score doesn’t necessarily have to hold you back from your꧟ dream of homeownership. It may be more challenging to ge🥀t a mortgage, but it’s still possible. However, you’ll have fewer options and could pay more for your loan. If possible, consider postponing your home purchase until you’re able to improve your credit score. Doing so could save you tens of thousands of dollars over the duration of your loan.

Finally, knoꦇw that having a bad credit score when you buy a home doesn’t have to affect your loan forever. If your credit score improves after you buy a home, consider refinancing your loan to achieve a lower interest rate.