Your credit history is one of the most important details lenders consider when approving you for a mortgage. Bad credit or a low credit score will compromise your ability to get a mortgage. Lenders will consider you at risk of defaulting on your loan. Obtaining a mortgage has become even more difficult due to the struggling economy. Add to this the record number of foreclosures in the housing market. However, it is still possible to qualify for a mortgage and buy a home, even if your credit history is far from perfect. Find out how now, as Moolr look at how to qualify for a short term loan with bad credit..
Get your credit score
To qualify for a mortgage, you will need your credit score. Your credit score is a three-digit number derived from your credit history. It is used by lenders when you apply for a credit card and is a key factor in receiving a mortgage from a lender.
- You can get your credit score for free by contacting your credit card company. Your bank can also provide your credit score, for a small fee or free during promotional times of the year. Avoid using online credit score services, as they could be scams trying to steal your personal bank information.
- If using an online free credit report, make sure that you are using a legitimate company. If you are unsure, you can contact a credit counselling agency, bank, or lender. They can recommend you a legitimate and reputable site to use.
Understand what qualifies as a bad credit score
In general, lenders will be more willing to approve a mortgage if a person has a credit score of at least 620. The best credit score is around 850. It can be difficult to achieve such a high number especially if you are in a younger age bracket and are trying to purchase your first home.
- If your credit score is 600 or lower, you will likely have a more difficult qualifying for a mortgage. But a low credit score does not mean you cannot qualify for certain loans. Thses include a Federal Housing Information loan, which usually approves individuals with credit scores of 500-600. You may also qualify for a VA loan if you’re a veteran.
- Keep in mind your credit score is only one factor to qualifying for a mortgage. Your current income, your ability to pay your bills on time, your credit history, and your current debt will also be major factors to getting a lender to approve your mortgage application.
Maintain a steady income
When lenders look at your mortgage application, they will take into account your ability to pay your current expenses on time every month. They will also check that you have been employed with a steady income for at least two years. They want to see you are making enough money to pay all your bills every month.
- If you are self-employed, you should try to maintain a steady yearly salary. Being self-employed and having a low credit score can lead to some frustration when applying for a mortgage. Maintaining a strong income will give you a leg up. It will make it easier for a mortgage broker to find lenders willing to give you a mortgage.
Reduce or eliminate your debt
Debt from student loans or overdue credit card payments will affect your credit score. About 35 percent of your credit score comes from your payment history. Focus on reducing your existing debt by always paying the minimum amount of your credit card payment and your student loan payment on time. If possible, put down more than the minimum amount each month to further reduce or eliminate your debt.
- Look at your credit report for any past due accounts or late payments. If you have accounts, like a student loan payment, that is 90 days or more overdue, pay those off first. Accounts that are 60 to 30 days late will have a less negative impact than accounts that are 90 days or later.
- Lenders will see that you have been making an effort to pay off overdue accounts and reduce your existing debts. This will bring your credit score up and help improve your chances of qualifying for a mortgage.
- If your credit report is showing that an old bill is unpaid, you should not pay it unless you are able to pay it back in full. A partial payment may make the debt more relevant, which can hurt your credit score.
Adjust your debt to credit ratio
To qualify for a mortgage with poor credit, you may want to adjust how much money you owe so it is significantly lower than how much credit you have available. Improving your debt to credit ratio is one of the fastest ways to improve your credit score and make you more attractive to lenders. You can improve your debt to credit ratio by:
- Keep paying down your revolving debt, like credit cards and lines of credit. Though paying down instalment loans, for example, student loan payments, can also help your credit score, revoking debt should be your first priority to improve your credit since revolving debt requires high-interest payments.
- Consolidate your credit card debt into a personal loan. A personal instalment loan can be taken out through your bank and will allow you to address all your debt in one place. This type of loan generally has a lower interest rate than revolving credit card balances.
- Adjust how you pay credit card payments. You can do this by asking for a credit increase from your credit card company, as this will improve your debt to credit ratio. Credit increases are valid for helping improve debt to credit ratios, but not if you use the extra credit. You can also move some of your existing credit card balances to other credit cards. However, both options can be risky as they can lead to overspending and more debt if you are not disciplined or smart about your credit card payments. The best way to address credit card payments if to pay off the minimum balance every month and try to reduce your credit card debt as soon as possible.