Getting a mortgage loan with decent credit can be challenging in of itself, but even more so with bad credit. So, it is of utmost importance to protect one's credit at all cost because one will never know when a good credit history is going to be the difference between owning a home and not owning one. So, how would one go about getting a mortgage with bad credit? It is very difficult, yet very possible.
Providing that one already has a job, the first step is to get a copy of one's credit history from not one or two but from all three credit bureaus'”Equifax, Trans Union, and Experian. The loan officer looking over the credit history will see that it is in dire need of repair. They will then inform the applicant of exactly how to go about repairing the credit report.
Calling creditors and setting up payment settlements is the next major step toward getting a mortgage with bad credit. Most times creditors will work out settlements requiring borrower to only pay a fraction of the original loan. By law, a borrower is required to pay at least 65 percent of the original loan. However, it depends on the creditor. Some will settle for more and some will settle for less, depending on their individual company policies. Always negotiate to payback as close to 65 percent of the original loan as possible.
After most of the delinquencies are cleared up on the credit report, the loan officer will make sure that payment arrangements are made for unpaid debts. Once a payment arrangement is made, the loan officer will use the middle score of the credit report to present to the loan underwriter of the bank or mortgage company for approval. The three credit scores from all three credit bureaus are compared and the one with the second lowest score will be chosen. It is called the middle score. For example, if a person has scores of 547, 588, and 512 from Equifax, Trans Union, and Experian respectively, the Trans Union score of 588 will be chosen.
The way the credit reporting agencies come up with individual scores is by using the FICO scoring system, which is an acronym from the name Fair Isaac and Company. It measures individual activities on a person's credit report or credit history. The score measures from a range of 400 to 700 plus, with 400 being poor credit and 700 being excellent credit.
The individual activities are measured in percentages: 35% of the score being based on payment history'”any late payments will reduce this score; 30% of the score relates to the amount of credit a person owes'”too much credit cards will reduce this score; 15% of the score pertains to the amount of time a person has had established credit'”one could have no debt, but still have poor credit; and 20% relates to whether or not a person is taking on new debt'”numerous credit applications will reduce this score. Therefore, the best way to qualify for a mortgage with bad credit is learning how the FICO scoring system works and using it to one's advantage.
Another avenue that one could use in getting a mortgage with bad credit is employing a cosigner, a person with great credit and one who will be willing to cosign a mortgage loan. Some people will charge a fee for cosigning.
While paying back loans, one should pay back more than the minimum balance. For example, if the minimum balance is $20, one should pay at least $21. This will show creditors that one is making an effort to eliminate his or her debt as fast as possible. Moreover, paying off more than is owed will help reduce overall interest paid on the loan.
Having a little money saved up in the bank will increase the chances of one getting a mortgage with bad credit. This money does not have to be used toward the mortgage, but the bank will want to see that one will have the means of making payments on the loan for a while if there is an unforeseen illness and one is not able to work for a while'”say, six month or so!
Lastly, it is a good idea to search for lenders who specialize in giving mortgages to people with bad credit. They will be better able and equipped to offer the most appropriate services.
Getting a mortgage with bad credit is challenging but is still very possible, once the correct approach is followed. The credit report is the first thing a creditor looks at; so if people understand how the FICO scoring system works and are able to use it to their advantage, they will be able to get mortgages with bad credit, no matter how difficult the task may seem. Having a cosigner assist in the signing process of the mortgage can make it possible in owning a home. Paying a little more on minimum balances can make a big difference in the amount of interest paid on loans as well as improve the chance of receiving a mortgage with bad credit, and putting some money away in a savings account can make the overall mortgage application process a bit simpler for anyone with bad credit.
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