Easy loans for bad credit borrowers were common amid the housing boom in the early 2000s, but they’re now rare.
If you’re interested in buying a home nowadays, lenders will carefully check your credit and rarely will approve a loan for someone with bad credit.
For that reason, it’s important to check your credit report and your credit score.
Many consumers are surprised by their credit score and many find errors on their credit reports. Carefully review your credit report and focus in particular on negative items to see if there are ways you can address them and improve your credit profile and your access to a mortgage.
Boost Your Credit Score
While there’s no quick fix for bad credit, taking the following steps to improve your credit profile can raise your score over time:
- If you have any collections or judgments against you, pay them off as quickly as possible.
- Bring your over-the-limit and past-due accounts up-to-date.
- Pay all bills on time.
- Try to reduce your credit card debt to 25% or less of your credit line on each card.
- Don’t open new lines of credit.
- Don’t close your credit card accounts, because then you’ll be using a higher percentage of your overall credit limit.
- If you have an old credit card that you haven’t used in awhile, use it and then pay the bill in full to show you can responsibly handle credit.
A reputable lender can suggest specific actions such as which credit card bill to pay off if you can’t eliminate your debt, so it would be a wise move to visit a lender as soon as you’re considering buying a home.
Credit Scores and Lenders
A lender can be a great source of advice about your credit issues and can tell you what minimum credit score is needed for a particular loan program. Different lenders have different loan standards, so while one lender may reject you with a credit score of 640, another could give you a loan approval.
In general, FHA-insured loans have lower credit score requirements than conventional loans. In addition, the FHA has loan programs making it easier for some people who lost a home in a short sale or a foreclosure to get a new mortgage faster.
While FHA loans can be easier to qualify for if you have damaged credit, the downside of this loan program is you must pay mortgage insurance on the loan, usually for the life of the loan. FHA mortgage insurance is typically higher than private mortgage insurance.
Private mortgage insurance also is automatically cancelled when your loan-to-value ratio reaches 78%.
Conventional lenders base their interest rates on your credit score, among other factors, so if your credit score is above 740, you’ll pay a slightly lower interest rate than someone with a credit score of 700.
Lenders look at many factors when evaluating you for a mortgage loan, including your debt-to-income ratio, your income and assets, how much your down payment will be and your job history.
These compensating factors can sometimes help you overcome a slightly low credit score, but your best chance for a loan approval is to improve your credit score.