How to Get a Mortgage with Bad Credit

Many people assume that because of their bad credit that they would never qualify for a mortgage. Getting a mortgage with bad credit will take more work, but it isn't impossible. Below are some tips on how to get a mortgage when your credit score isn't ideal. These insider tips originate from my personal observations from working as a closing secretary for a real estate attorney over the course of several years.

Get Credit Reports

The first step should be to obtain a free credit report before even searching for mortgage lenders. Americans are entitled to one free credit report for each bureau per year via AnnualCreditReport.com; however, those credit reports may not include your FICO score. FICO scores are a huge factor in the interest rate offered, so it is important to have an idea of what your FICO score is before attempting to find a mortgage company. Obtaining a credit report from each bureau also alerts buyers to any credit errors that should be remedied before making any application for a pre-approval or mortgage application.

In addition, your Realtor will want to have an idea of what your credit is like so that they can best assist you in finding a home in your price range, based on the rate they predict you will be offered. Moreover, they will also be able to steer you toward lenders that cater to home buyers with credit issues. Often, well-known lenders have consumer loan companies under their umbrella that fund riskier loans.

Seller-held Mortgages

Seller-held mortgages are a great option for those with bad credit. The seller may charge a higher rate, but if a buyer with bad credit is interested in their property, they may be willing to hold the mortgage as an investment. One negotiation tool would be have the mortgage drafted with a balloon clause requiring the loan to be refinanced by a date certain. This is a win-win situation for both the seller and buyer because the seller will carry the loan for a short period of time, reducing the risk of loaning money to a bad credit risk and the buyer will have extra time to repair credit issues, while making monthly payments to the seller who can be used as a credit reference when it comes time to refinance the loan.

Large Down Payments

Money talks and having a large down payment to put down on a house may make a bank more willing to fund your mortgage. Expect to put down a larger down payment than typically required to fund a conventional loan. The more money used toward a down payment reduces the bank's risk in funding the loan. Therefore, if one's credit is bad or less than optimal, plunking down a huge down payment could entice a lender to fund the loan or perhaps even offer a more favorable rate.

Sources:
Personal experience

Disclaimer: This article is not meant to offer legal advice. Please consult with a licensed attorney for advice on legal matters.