There are a number of reasons why you may have a low credit score or be saddled with a bad credit rating, but that may not automatically preclude you from getting a home loan or mortgage if you need one. It’s an unfortunate fact of life that some of the very things that have ruined the credit of many people are the same things that have made homes much more affordable over the past couple of years.

Living Well with Bad Credit

Reasons for Bad Credit Ratings

The underlying story behind your bad credit rating will definitely affect your likelihood of being able to get a home loan from a sympathetic vendor. If, for example, you got behind on your bills during an extended job lay off that was out of your control, then a mortgage lender might look more favorably on you than if you had decided to just walked away from a home that was underwater even though you could clearly afford the monthly payments.

Likewise, your current situation (and how long you’ve been in it) may quickly serve to negate your poor credit rating. The more months you can prove that you’ve been able to pay your bills and even stay ahead of the game, the more likely you are to get a home loan, even if your current credit score is low. As the months go buy your credit rating will slowly and gradually increase, making you a much more attractive borrower in the eyes of the bank.

Remember: a bank wants to loan money for mortgages so that they can get the money back with a little bit of interest. They don’t want to give the money to people who cannot repay it, and having a bad credit rating is a big rad flag for most bags. That being said, there are ways to improve your credit rating and having proof of those efforts to improve your financial situation can be enough to convince a bank that you’re a worthy credit risk.

How To Get A Mortgage With Bad Credit

1. Begin Improving Your Credit: There are lots of different ways you can begin improving your credit rating, but one of the most basic is be sure you’re spending less than you’re taking in each month. You can attend debt counseling classes, get a second job, reduce your overall spending and simply be much more careful about your spending and financial situation. These little steps will all begin making a difference and will begin appearing on your credit report in as little as just a few months. Home loan lenders look at recent as well as past history, so if you made some bad decisions a few years ago that lowered your credit score they might look at your more recent credit activity to see if you’re straightened out your finances.

2. Compile Assets, Income and Debt: Before you apply for a home loan you’ll want to get a good grip on all the financial numbers in your life. If you currently own a home then you’ll want to know the value and the amount of equity you have it it. You’ll want to have a pretty good idea of your yearly income and have proof of that income on paper through pay stubs or tax returns and you’ll also want to have copies of monthly bills that are due. All of these numbers will be important for the next steps.

3. Plan for A Realistic Mortgage: You obviously can’t spend money you don’t have, or aren’t making, so don’t try. You’ll probably need to be pre-qualified from a bank or mortgage lender before you are serious about your house hunting. If you’re making $50,000 a year it probably isn’t a good idea to look at $500,000 houses. Generally, you’ll want to examine your debt-to-income ratio and stick with an amount that’s less than 20%. Your debt-to-income ratio is your monthly debt (car, regular payments, credit card payments) by your net (after taxes) income. You would not include things like food and incidentals. So let’s say you make $3,000 a month and you have a regular monthly debt of $500. The math would follow like this: $500 debt divided by $3,000 income equals about .16 or 16% debt-to-income ratio. Once you add in your mortgage costs you’ll still want your debt-to-income ratio to generally be under 33%.

Be careful: some home loan lenders will sometimes try to loan you more money than you can reasonably pay off, though this practice is much less prevalent than it once was before the housing bubble burst.

4. Compare Home Loan Offers and Lenders: Now it’s time to seriously begin speaking with mortgage lenders about what they have to offer. Some may not want to work with your at all, based on your bad credit from the past, but others may be more willing. Small local banks are often better bets for people with bad credit, especially if you have a prior banking relationship with that institution.

There are still plenty of home loan companies that specialize in bad credit loans, but you’ll want to be extra careful about working with any company that “looks too good to be true” because chances are that it probably is. Even after everything that’s happened to banks and home loans in the past several years there are still some dishonest and unscrupulous mortgage lenders out there. Here are some things to pay attention to when you’re comparing options from one private loan lender to the next:

Closing Costs: They should be listed out line by line and they may differ quite a bit from one lender to another. Be careful if any lender says not to worry about these sort of costs. Check out processing fees, legal fees and other line items that have a cost associated with them from one lender’s offer to another. Also watch to see if one lender includes fees that another doesn’t. That might be a red flag that you are being overcharged or it could be a sign that something is being inadvertently hidden.

Interest Rate: This is one of the more important values to compare. You’ll want to make sure you’re getting a good interest rate (lower is better) but you’ll also want to understand if that rate is fixed or if it’s subject to go up or down. A single late payment should not make your interest rate skyrocket.

Payment Modifications: Watch for balloon payments or other “gotchas” that may sneak up on you if you’re not careful. A traditional 30-year-fixed-rate mortgage is often considered one of the “safest” even though it may not be the cheapest in the first several years of payment. You’ll want to consider the overall amount of interest you are subject to owing over the entire life of the loan, and not just at the beginning or end of the loan.

5. Consider Alternate Home Loan Lenders: If private lenders or banks are not willing to work with you for a reasonable home loan due to your bad credit, then you might want to consider an alternate source of borrowing money. You may qualify for a non-traditional loan such as a Title 1 Home Loan, a VA loan or some other loan from the government or other organization you may belong to. Even credit unions are known to offer loans that are often more competitive than those offered by private banks.

Remember, your bad credit may prevent you from getting the very best home loan rates and deals out there, but if you’re making progress in cleaning up your credit rating then you definitely have a good chance of getting some sort of fair mortgage deal. As your credit improves you can consider re-negotiating the terms of your loan or applying for home loans with lenders who are going to offer you a better rate and terms. The skills and mindset required to get a bad credit home loan are similar to those you must employ to get a bank to modify your home loan: patience, persistence and a positive outlook!