Getting a mortgage is much harder with bad credit. Having a record of foreclosure, bankruptcy, or late payment can make lenders wary of extending credit. Unfortunately for many homebuyers, these marks don’t disappear magically. In the case of late payment, it will take seven years for your credit report to no longer have that blemish. If you’re seeking a new house or condo and you have a subpar credit score, it’s imperative that you take corrective action sooner rather than later so that you lenders will approve your mortgage and you can have the home of your dreams.
Understand Why Your Credit Is Bad
Get a free credit report. Many credit cards now offer monthly credit scores for free, so if you happen to have a card with this feature, use it to look at your score. Obtaining your report is the first step in understanding what you need to do to fix your score and get better interest rates. For example, if your credit report reveals a very high revolving balance to total credit, your best bet will be to pay some of that debt down. One option is to transfer those balances to a personal loan. Your score will take a hit with the inquiry, but over time it will go up as the revolving balances will be lower. Another option, although not necessarily advisable, is to take out a 401(k) loan. These loans are not reported to the credit bureaus so if you do have retirement assets and you want to pay down those credit card debts quickly, taking a loan against your 401(k) will only improve your score. Look at your credit score and figure out if there are ways to improve it in the future.
Try To Remove Bad Marks
Credit reports are not static. Many times bad marks can be removed. For example, if you were 30 or more days late on a payment a couple of years ago and have since made good with the creditor, you can often ask them to remove the late payment mark. Some lenders will and some won’t, but it doesn’t hurt to ask. You can usually write a letter asking for a “goodwill gesture” to the credit agency. Effectively this letter asks that the lender remove the mark as a gesture of goodwill to help you with some significant expense. Many lenders will get rid of the late payment remark if you are all caught up on your debts. Even if you cannot get all late payments removed, getting some removed will help you get credit. For every bad mark on your credit, remember that it never hurts to ask to get it removed!
Bring A Bigger Down Payment
Your loan-to-value ratio is critical. Asking for a mortgage that exceeds 80% of the house’s worth will incur higher interest rates and a higher rate of denial. If you have $20,000 down, see if you can find a property that is worth $100,000 as it will be much easier to obtain a mortgage with 20% down than with 10% or 5% down. Your interest rate will be significantly less as well. Bringing a larger down payment relative to the home’s value is a great way to get your mortgage approved with a phenomenal interest rate.
If you’re shopping for a property and you know your credit may not be stellar, make sure that you obtain a copy of your credit report in advance. Study it. Look for any negative marks that you think you can negotiate to be removed. Also, look for opportunities to reduce balances to raise your scores. Once you’ve done as much as you can for your credit score, consider buying a property with 20% down. Doing this will make lenders much more willing to extend the mortgage than with a lesser percentage down. Most importantly, don’t despair. With enough planning and work, you will be able to land the home and mortgage of your dreams!