How to Get a Mortgage with Bad Credit

A lot of people would like to purchase a home outright, but think that their bad credit history makes them ineligible for a mortgage. Fortunately, since a mortgage is a secured loan (meaning the bank can foreclose on your house if you stop paying on the loan), most people with bad credit are still able to qualify for a mortgage. Unfortunately, having a negative credit history means you will probably end up paying more in interest & fees on your mortgage than someone with a good credit history. However, there are still some steps someone with bad credit can take to qualify for the best mortgage terms possible.

First and foremost, you'll want to get a copy of your credit report before you start applying for mortgages with bad credit. You should carefully go over your credit report and check for possible errors. Many times, people with bad credit have incorrect items on their reports which make their credit scores even lower. Look for accounts that are still reporting a balance that you know you've paid off, and also check that there is no debt on your credit report that is more than 7 years old (the "statute of limitations" for negative items on your report). If you don't currently have any positive credit items, consider opening a secured credit card and making regular payments on it to help rebuild a positive credit history.

People with bad credit who are seeking a mortgage should also see if they qualify for a government or H.U.D. loan, as these mortgages tend to have better terms and less stringent credit requirements. If you are buying a home with a spouse or significant other who has better credit, you may want to consider putting the mortgage in their name only since they will most likely qualify for a much lower interest rate. If you do this, you can always refinance and add your name to the mortgage a few years down the road when your credit is better.

Finally, if you want a mortgage with bad credit, you should be prepared to make a higher down payment up-front. Many banks will want at least a 20% down payment on a mortgage with bad credit, whereas someone with better credit might only need 10%. Don't let bad credit stop you from your dream of owning your own home--your probably closer to qualifying for a mortgage than you think!