There are no guarantees in attempting getting a mortgage with bad credit. However, with pending rate increases and still a reasonable real estate market, it’s worth a try. And, if you work on a few things you can increase your chances for approval.
Stesps you can take to get a mortgage with bad credit
The amount of income is not necessarily “the” key factor. Mortgage lenders are willing to grant a mortgage loan with poor credit as long as the borrower can demonstrate their ability to make repayments for the 25 or 30 years of the mortgage term.
Typically a borrower has to have enough income and low enough existing obligations so that the amount of those obligations plus the mortgage payment represents less than 40% of their income. For example, with a monthly income of $5,000, if the mortgage loan repayments raise total debt repayments to less than more $2,000, then the application can be approved.
Even with a low credit score if other factors are in place, and the borrower is showing increases in their credit score the underwriter may look more favorably on it.
There are two ways to increase a credit score. One is to build positive credit by getting credit lines (credit cards, etc.) that will turn into positive trade lines on the credit report. The only issue with this just before applying for a home loan is that it may appear that the borrower is trying to access too much credit, and eventually have too large of a credit limit.
The other way to increase a credit score rather rapidly is though credit restoration or what some people refer to as credit repair. This is the process of getting older derogatory items removed from a credit report because the creditor does not validate or verify the accuracy of the account. This can be done by the consumer but it is advisable to use a reputable credit restoration company. Just as someone could represent themselves in court it isn’t the best use of someone’s time nor do they perhaps have the expertise necessary for success especially if you are trying to get a mortgage with bad credit.
There is no underestimating the advantages of providing a large down payment. Usually, about 5% is the minimum required. But when it comes to applying for a mortgage loan with challenged credit, it may require a substantial amount more. For example, a 10% down payment on a property worth $250,000 requires $25,000. The financial discipline required to get $25,000 together is significant. This kind of discipline is exactly what lenders want to see before approving a mortgage loan.