How to Get a Mortgage with Less Than Perfect Credit

It is possible to receive a mortgage, even with less than stellar credit. Most lenders, however, are very risk adverse, and bad credit will raise a red flag. To reduce the risk that the lending company perceives you to bring, they will typically ask for a larger down payment and higher interest rate or closing costs. The belief is that this helps to offset their risk.

There are several steps that you can take to get the best deal on a mortgage with less than ideal credit. The first is to analyze the loan to value ratio of the properties you are looking at, and not shop at the high end of your budget. The loan to value ratio compares the amount that you plan to borrow with the amount that the property is worth. Because the property will be used as collateral, your lender will want to be certain they can resale the property to recoup their investment if you default on the loan.

While a typical loan to value ratio is 80%, with the amount borrowed not exceeding 80% of the value of the home, if you have less than perfect credit, borrowing even less makes sense. You can make up the difference by having a larger down payment. If you can get the loan to value ratio at around 65 to 70%, most lenders will be very happy.

Another ratio that is important is the debt to income ratio. The debt to income ratio should typically not exceed 40%, although some lenders will go as high as 60%. You can expect to pay for these more generous terms with a higher interest rate. The debt to income ratio includes all sources of debt, such as auto loans and credit card debt and compares it with your monthly net income.

Saving Money, and Improving Your Credit

While it is very possible to receive a mortgage with less than ideal credit, you can save money by straightening out your credit ahead of time. Credit is affected by financial crisis, such as bankruptcy and foreclosures, but also smaller financial situations, such as slow payments. Less than perfect credit can cost you in a variety of ways, including the requirement for a larger down payment, a higher interest rate over the life of your loan and higher closing costs.

Although you can always refinance later, once you get your credit cleaned up, it makes sense to begin now straightening up your credit. Although credit repair takes time, you will be surprised at how quickly you can improve your credit score once you make it a priority. Get started today to improve your credit.

• Check your credit report. If you know that you have credit problems, you may think that checking your credit report is an exercise in futility. However, those with perfect credit are not the only ones that may find mistakes on their report. Spend a few minutes checking your credit report to catch any errors. Everyone is entitled to a free copy of their credit report annually from each of the three major credit reporting agencies.
• Pay your utility bills promptly. You will need to pay them eventually, so make sure they are in before the due date. This is a simple way to improve your credit score. Often late payments are the result of disorganization as much as anything. Establish a bill paying system, and consider paying online or automating payments.
• Settle existing loans and pay off credit card debt. While it takes patience, paying down existing debt is the only way to improve your debt to income ratio. Consider putting off the house purchase for six months to a year if necessary, and put all extra money into paying off existing debt.