When you start searching for a home loan, you’ll see that most lenders are searching for “triple threat” applicants. No, I’m not talking about people who can act, sing, and dance well. I’m talking about a borrower’s triple threat—someone who has an excellent credit rating, a large down payment, and a steady job that gives them a low debt-to-income ratio. While these “triple threats” are the prime applicants for a mortgage, less-than-perfect applicants shouldn’t give up hope. We’ve already talked about how to find a mortgage with low or no down payment, so today we’re going to look at what to do if your credit score’s not up to snuff. It’s certainly possible to find home loans for bad credit; you’ll just have to work a little harder than the average borrower.
Home Loans for Bad Credit
A bad credit score is a red flag for mortgage lenders. Some may see that less-than-stellar number and immediately assume that you are irresponsible, untrustworthy, and careless with your money. Maybe you were or maybe you just had some bad luck. Whatever the case, you need to show your mortgage lender that you’re improving your credit score and have other qualities that make you a good candidate for home loans for bad credit.
If you have any of the following qualities, be sure to mention them in your home loan application or when you speak with a prospective lender. Just a few checkmarks might be enough to tip the scale back into your favor:
- You have a large down payment prepared.
- You don’t have much debt.
- You have whole life insurance (list the cash value on your application).
- You have a 401(k) or other retirement accounts (list each account and its value).
- You have a low loan-to-value rating (this is more important if you want to refinance).
- You have a stable income.
- You’ve been working at the same company for 5+ years.
- Your salary is regularly increased or you receive regular bonuses.
- You put a good amount of money into a savings account each month.
- You lived at your last residence for a significant amount of time (three years or more).
- You have strong ties to the community and have no interest in leaving.
- You are looking for a modest home that is well within your means.
- You have documentation that shows a history of timely, full payments (for rent, child support, savings, etc).
All of these factors will help mortgage lenders see past your bad credit score and, hopefully, give them confidence in your financial health. Some factors are obviously worth more than others— having a hefty down payment is far more beneficial to you than being committed to your community—but if you can combine a number of these factors, you’ll be able to show lenders that you’re a well-rounded, reliable candidate.
The retirement accounts let lenders know that if you’re ever in a bind and are struggling to make your mortgage payment, you’ll be able to pull from your savings in order to make that payment. Regular bonuses or pay increases show that you’ll have additional funds in the future and so won’t struggle if your property taxes or utility bills rise. Regular contributions to a savings account or 401(k) show that you’re moving past your bad credit history and are now disciplined and reliable with your money. And by searching for a modest home, you’re showing lenders that you’ve learned from your bad credit score and aren’t planning to bite off more than you can chew when it comes to purchasing a new home.
Your options will be limited and you won’t be eligible for great interest rates, but home loans for bad credit are certainly out there.
If worse comes to worst and you still aren’t able to find home loans for bad credit scores, remember that you can always wait. If you improve your finances (pay off your debt, pay your bills in full and on time, etc.), you can raise your credit score in 1-2 years.