How to Get a Mortgage with Bad Credit

By Eric Tyson, Robert S. Griswold

“You can run, but you can’t hide” aptly describes the futility of trying to duck creditors. Many potential homeowners admit defeat before even applying because they fear the task of figuring out how to get a mortgage with bad credit.

If you have pecuniary problems with the butcher, the baker, or the candlestick maker, woe be it to you if you’re ever slow and sloppy when paying your bills. Creditors have a nasty way of getting even with you. They report your delinquencies and defaults to credit bureaus. These fiscal zits deface your record for years to come whenever anyone obtains a copy of your credit report.

If your credit history is a smidgen less than sparkling, one key element to getting your loan approved is immediate, detailed disclosure of any unfavorable information. Don’t play games. Give the lender a complete, written explanation of all prior credit problems when you submit the loan application. Financial dings tied to one-time predicaments such as serious illness or job loss that you’ve satisfactorily surmounted are usually relatively easy to handle.

Also, some credit card lenders, particularly ones that are part of a retail establishment (for example, department stores), may change what they report to the bureaus as a matter of “customer convenience.” Macy’s does not want you mad at them, so ask their credit department if it will modify what it reports for your account.

It pays to take the initiative if you have trouble obtaining a mortgage. Ask your loan officer to list all the derogatory items you must rectify to get loan approval. Instead of wasting your valuable time trying to guess what’s wrong, you’ll have a nice, neat (hopefully short) checklist of everything you must correct.

Here are four ways to conquer a bad-credit mortgage:

  • Seek sympathetic lenders. Lenders start with mostly the same underwriting guidelines for conventional loans. But many lenders add additional restrictions called lender overlays that make qualifying more stringent. For instance, at the time of this writing, FHA allows credit scores down to 580, but many lenders will not make FHA loans below 600–620. You may have to figure out if you are running up against the actual underwriting guidelines or a lender overlay. The only way to find out is to ask a few different lenders. When you interview lenders, don’t be coy. Ask them whether your credit blemishes present a problem.

    Depending on the magnitude of your mess, you may want to secure the services of a mortgage broker. Because they often assist people with credit problems, mortgage brokers already know which lenders will be most understanding about this kind of fiscal frailty. Mortgage brokers are typically approved with a number of lenders — and thus have more options in placing a mortgage.

  • Seek seller financing. Tax advantages and high rates of return induce some sellers to offer financing for the buyers of their properties. Sellers can be more flexible when dealing with credit blemishes than conventional lenders, because they aren’t hampered by so many rules and regulations. If you’re financially strong today, a seller may be willing to overlook your past credit problems.
  • Seek a co-borrower. Once again, try to obtain the cooperation of the ever-popular co-borrower.
  • Seek savings and spruce up your credit. If the lenders you’ve talked to either summarily reject your loan application or offer you outrageous loans with stratospherically high interest rates and fees, why rush to buy a home? Instead, continue renting. Concentrate on two goals — saving money for your down payment and keeping your credit record spotless. After a couple of years, lenders will be knocking at your door day and night beseeching you to honor them with your business.

Don’t waste your time working with a company that says it can quickly repair your credit. You may be told that, for a fee, your legitimate credit problems will be removed from your credit report. Sound too good to be true? It is.