Is it Possible to Get a Mortgage with Bad Credit?

For any borrower with a credit score below 580, there is an entire market of mortgage loans known as sub-prime mortgages. These mortgages extend debt to low credit score borrowers with higher interest rates than conventional mortgage debts. These mortgages are meant to be short-term options to help a borrower fix his credit and eventually qualify for a conventional mortgage option. Sub prime lenders are notoriously predatory and tend to charge high fees for the risk associated with the loan. Any borrower who goes into a sub prime mortgage should request an outside second opinion to find out if the loan is a financially sound decision.

Credit Markets are Tight.

As of mid-2009, subprime mortgages are almost non-existent. Credit markets have tightened up and borrowers are subject to much more stringent lending rules and regulations than prior years. Many borrowers are unable to get mortgage loans with credit scores below 620, much less below 580. If there are even options available, the down payment requirements tend to be too large for the borrower's savings accounts. As of early 2010, FHA (a common government mortgage loan option) has begun requiring borrowers with credit scores below 620 to have a minimum 20 percent down payment. This is opposed to borrowers with credit scores of 620 and above having a minimum 3.5 percent down payment. As one can see, the requirements are hefty. Additionally, there is a "hit" or addition to the interest rate for every 20 points lower in a credit score, starting with 720. Therefore, a borrower with a 580 or below credit score is looking at a significantly higher interest rate than a borrower with a 720 credit score.

Bottom line:

It is very hard to get a conventional mortgage in the 2010 mortgage market, much less a sub prime mortgage. Until the credit markets loosen up, many borrowers with low credit scores will be unable to get a mortgage, or be required to meet very stringent rules and regulations prior to loan approval.

A borrower's best bet is to attempt to raise his credit score as much as possible prior to applying for a mortgage. This can be done in a variety of ways. First and foremost, he should check his credit through an online resource, such as AnnualCreditReport.com. Any errors should be immediately reported to the credit bureau through this site. Next, he should look to see if any negative items, such as liens, bankruptcies, judgments, or other collections are on his account. If so, he should pay those items in full. Lastly, he should look at his credit card balances. They should be at less than 30 percent of the credit limit to have the least impact on his score. It should take between 30 and 60 days for a borrower's credit report to reflect any changes made.