How to get a mortgage with bad credit – Not everyone with a bad credit history and financial debts will be turned down for a mortgage.There is much you can do to leverage your position in order to qualify for a home loan.
Banks and financial companies are flushed with cash.They don’t know what to do with it,and are willing to give home loans at higher rates of annual interest even to sub prime risky customers – who have paying back potential.
What is considered a bad credit score for a mortgage?
FICO credit scores range from 300 to 850 and the average resting at 650.Bad,good and excellent credit scores vary a little for different products – credit cards,auto loans,mortgages.A low credit score for a mortgage might be considered “not so bad” while applying for a credit card.
For home loans,bad credits scores are considered 580 and below,average are from 580 to 670 and above 670 are good.these good credit scores get mortgages at lower interest rates and other small perks.
The lower the credit score, all the more you are considered a risk to the lending company.There are many FHA and VA loans that can be availed for people who have low credit scores and offer mortgages without down payments and easy to pay monthly installments.
How to get a mortgage with bad credit
- Apply for VA loan – These types of loans are available to people who have a low credit score,however not everyone can apply for it because these are only for veterans,military and navy servicemen as well as certain state forest rangers and their spouses.
- There are many benefits to this type of mortgage as you don’t need to pay a downpayment,no closing costs,low interest charges and no loan insurance.
- Apply for FHA loan – Federal housing loans are meant for people who bad credit and the lenders are secured by the Federal housing association.Here too there are low prepayment penalties, low down payment,easy payment plans.
- Reduce credit utilization – The ratio of how much you use on your credit card to how much balance is there on it gives the credit utilization.
- The lower your CU,the better your chances at getting a home loan.The recommended value is 30% – meaning you need to keep your credit card balance at 30% of the total amount available on the card.
- This will be reported to the 3 credit bureaus every few months and creates a good track record.
- Get a guarantor – Some lenders require you to be introduced by a guarantor.These guarantors are also known as co borrowers although you will be taking out the housing loan – however if you fail to repay the loan amount,these guarantors could be held liable.Also the credit history and financial standing of these guarantors needs to be satisfactory in order to vouch for you.
- Give a larger down payment – The higher the downpayment on your new home means a lesser loan.This is always considered a positive step towards paying back your home loan and gives the lender more confidence to sanction the loan for you.If you have poor credit then you need to increase your loan to value ratio.More about that below.
- LTV – There are two verticals associated with your ability to secure a housing loan – debt to income ratio and loan to value ratio.By accumulating less debt and having a steady job you can lower the debt to income ratio.
- On the other hand,the LTV can be brought down by giving a larger initial down payment and reducing the loan amount.
- Reduce Debt – Debt is always a black mark on your file.When a prospective lender checks your financials to ascertain the risk element,they will see how you have dealt with debt in the past.
- If you have shown considerable ability to clear outstandings in the past,it is a positive sign towards securing a mortgage.