How Can I Get a Home Loan with Damaged Credit?

During the national economic downturn, millions of consumers in the United States experienced a change in their finances. Some had work hours reduced, others were unemployed, and that lead to making strategic spending choices. These included things like paying for groceries and utilities first, then, if enough was left over, credit card bills. Missing a few or many payments impacts a person’s credit file in a negative way and their scores are lowered as a result.

To get a mortgage today, you’ll have to go in with a decent credit score, about 640 to 660 at the lowest. Those with scores in the high 700’s will fetch the best rate and not have to commit to a huge down payment. High score holders will not have to supply as much documentation and will be able to finance between 85 percent and 95 percent of the cost of the home. That might mean a higher monthly payment, but rates are still low and that will save thousands over the life of the loan.

Why Bad Credit Doesn’t Mean You Cannot Get a Home Loan

If you have a damaged credit file because of a job loss or some other situation which caused you to miss out on certain payments, don’t believe that you’ll never be able to get a mortgage. Lenders do give preferred rates to cash-flush buyers with great credit scores, but they don’t necessarily turn down everyone with poor credit.

“Bad credit is often the result of circumstances that caused a disruption of a borrower’s intentions and wreaks havoc for would-be home buyers. Divorce, medical emergency, job loss or poor credit management may have led to bad credit. A home loan applicant may become discouraged if bad credit continues to prevent him from achieving homeownership. Using non-traditional methods and creative financing may enable a person with bad credit to obtain a home loan.” —San Francisco Chronicle

Though having a high credit score does help, the converse won’t prevent you from qualifying for a mortgage. Lenders look at other things to determine if an individual or couple is able to pay back a home loan. That’s what it really comes down to–your ability to repay the lender for the principal and interest.

How to Get a Mortgage with Poor Credit

Getting a mortgage is more than having a good credit score. You might not know some applicants have excellent credit, yet have a hard time being approved for a mortgage. One reason is they are self-employed; or, they job-hop. Regardless, there are things you can do to get a home loan with a low credit score:

  • Demonstrate your assets. If you have a 401(k), some money in the bank, and/or own your car or other assets, those will help to qualify you for a mortgage. A whole life insurance policy is another asset to list, as well as any other property you might own.
  • Make a bigger down payment. For those with damaged credit, a big down payment goes a long way. It shows the lender you are committed, but also lowers your monthly installment payment.
  • Lower your DTI. Your DTI, or debt-to-income ratio is the difference between your gross monthly income and your monthly obligations. Pay off what you can and have proof that those debts have been satisfied. Aim for a DTI of 35 percent or less.
  • Show you’re a longtime resident. If you’ve lived in the area for several years, that’s also going to reflect positively on you. Supply documentation to demonstrate you’re a long-term resident.
  • Prove you pay your bills on time. You should also be able to provide documentation that you pay your rent on time. Get a notarized statement from your landlord to give to your lender.
  • Reassure the lender you’re in a long-term job. Another set of documentation is your pay stubs or bank statements which show you’ve been at your job for a long time.