Securing a mortgage with poor credit

April 2nd, 2013

Purchasing a home with poor credit is challenging, but not impossible.

Obtaining a mortgage is viewed widely as a worthwhile investment, and many people look forward to buying a new home. However, consumers with poor credit may experience additional anxiety when it comes to qualifying for a home loan. A mortgage service company will examine several factors to make its determination about whether to extend a mortgage and the interest rate to assign to applicants. While a person’s credit score is not the sole determinant of their mortgage eligibility, it does play a dominant role. Consumers can expect that it may be more challenging to qualify for affordable terms, but it is not wholly impossible to secure a home loan if they take several preemptive steps to make themselves more attractive borrowers.

As a first step, Realtor.com recommends pulling credit scores and reports to determine which factors are causing poor credit. Individuals may have significant credit card debt, accounts in collections or carry negative public records information on their credit report. Some of these issues can be cleared up more quickly than others and help applicants bump up their credit scores before submitting a mortgage application. For example, those who are carrying large debt loads should strive to pay off as much debt as they can and refrain from running up new balances before and during the application process. Lenders will examine an applicant’s credit utilization rate – the ratio of their existing balances versus their available credit limits – when making their decisions. Large balances signify that borrowers may be living beyond their means, so cutting down on debt can help lower this rate.

Other credit report information – including accounts in collections, judgments, liens, bankruptcies and late payments – may take longer to fall off a credit record. Individuals should focus on paying bills on time to avoid any further damage to their credit record and be ready to explain why these negative marks appear on their report.

As consumers work to rebuild their credit, there are other factors they can improve upon that may increase the likelihood of being approved for a loan.

1. A large down payment
Lenders may be more likely to look past a poor credit score if borrowers can provide a sizable down payment of 20 percent or more. A large down payment not only lowers the amount of borrowers’ monthly mortgage payments over the term of their loan, but also lowers the risks for lenders. While a hefty initial amount may not equate to lower mortgage rates, it might be enough to assuage mortgage servicers into looking closely at other financial factors that make individuals a low-risk borrower.

2. A stable employment history
An employee who can show that they have remained with the same company or steadily employed in the same industry for a number of years may have a better chance at securing a loan, according to AOL Real Estate. One of lenders’ primary concerns is that a borrower may default on balances in the event of a sudden job loss. Individuals who demonstrate to lenders that their job is secure and that they have the industry experience to secure another position if necessary can put mortgage companies at ease.

3. Demonstrated proof of financial responsibility
If applicants’ poor credit ratings were the result of bad financial decisions made in the past, it is crucial that they provide evidence that they are practicing responsible money management habits. This may include statements that show a long period of on-time payments to credit card lenders, landlords and service providers. Borrowers may want to also provide bank statements that show consistent deposits of income or regular contributions to a retirement account.

Obtaining a mortgage with poor credit is not always easy. However, applicants who take the time and effort to play ahead and paint themselves as a responsible borrower may walk away with an affordable home loan.