How to Get a Mortgage with Terrible Credit: A Comprehensive Guide

Bad credit doesn’t automatically disqualify you from getting a mortgage – that’s what many potential homebuyers think. A low credit score creates challenges, but you have several options to get a mortgage even with terrible credit. The path to homeownership remains open if you know the right steps and understand your alternatives, despite a less-than-perfect credit history.

This detailed guide looks at mortgage options like FHA loans, VA loans, and specialized lending programs that work if you have bad credit. You’ll discover practical ways to boost your mortgage approval chances by saving larger down payments and partnering with mortgage brokers. The guide shows you how to rebuild your credit score and find loan options that fit your current financial situation.

Understanding Bad Credit and Its Impact on Mortgages

Mortgage lenders rely heavily on credit scores to assess potential borrowers. Each credit reference agency maintains its own unique scoring system. Experian scores range from 0-999, while Equifax uses a 0-700 scale, and TransUnion operates on a 0-710 range ¹.

What is considered bad credit?

Bad credit shows up through a history of missed payments, late payments, or more serious financial issues. The major credit bureaus have different standards for poor credit scores. Experian rates anything below 721 as poor. Equifax marks scores under 380 as poor, while TransUnion flags scores below 566 as problematic ¹. These scores substantially affect a borrower’s chances to secure favorable mortgage terms.

How credit scores affect mortgage applications

Credit scores play a crucial role in determining mortgage approvals and interest rates. Lenders don’t specify minimum score requirements, but borrowers with higher scores receive better terms and stand a better chance of approval ². A credit score calculation has these essential components:

Payment history makes up 35% of the score and reflects payment defaults and timely payments
Credit utilization accounts for 30% and shows how much available credit you use
Credit history length contributes 15% to the total score
Credit account diversity adds 10%
New credit inquiries impact the final 10% ³

Common reasons for bad credit

Your credit rating can suffer from several factors:

Missed or Late Payments: Lenders see recent missed or late payments as red flags ⁴.
Multiple Credit Applications: Too many credit applications signal financial trouble and hurt your scores ⁵.
High Credit Utilization: Large amounts of unused credit lower credit scores ².
Limited Credit History: Lenders struggle to assess your borrowing habits without previous credit history ⁶.
Serious Credit Issues: Your credit scores take a big hit from Individual Voluntary Arrangements (IVAs), bankruptcies, or County Court Judgments (CCJs) ⁶.

Bad marks stay on your credit reports for six years ¹. The good news is some lenders might approve your mortgage application if you put down a bigger deposit. To cite an instance, you could qualify for a specialist mortgage with a 25% deposit after completing bankruptcy or IVA payment plans ⁶.

Credit scores tell only part of the story in mortgage decisions. Lenders look at your job history, stable income, and debt-to-income ratio to assess applications ³. People with minor credit issues might get up to 90% mortgages if they meet other requirements ⁶.

Exploring Mortgage Options for Bad Credit

If you have poor credit, mortgage options still exist through lending programs of all types. Different requirements and qualifications apply to each option. These paths make homeownership possible even with credit scores that are nowhere near perfect.

FHA Loans

Federal Housing Administration (FHA) loans are among the most available mortgage options for borrowers with bad credit. These government-backed mortgages welcome credit scores as low as 500 with a 10% down payment. Borrowers with scores of 580 or higher can qualify with just a 3.5% down payment ⁷. The appeal of FHA loans grows stronger because they offer more competitive rates than conventional loans, even though they cater to lower credit scores ⁸.

VA Loans

Military borrowers with credit challenges can benefit greatly from Veterans Affairs (VA) loans. Most lenders prefer scores between 580-620 ⁹, though the VA doesn’t enforce minimum credit requirements ¹⁰. These loans recognize the unique financial situations that military service can create and are a great way to get support through:

No down payment requirement
No ongoing mortgage insurance
Competitive interest rates whatever your credit score
Shorter waiting periods after bankruptcy or foreclosure ¹⁰

Subprime Mortgages

Subprime mortgages help borrowers who have troubled credit histories. These specialized loans cost more with interest rates 2% above standard mortgages and need at least 15% down payment ¹¹. Lenders review each application carefully and look at:

The story behind credit problems
When the credit issues happened
The borrower’s current money situation ¹¹

Portfolio Lenders

Portfolio lenders are a great alternative that helps borrowers with bad credit. These specialized institutions do things differently – they keep their loans instead of selling them to other companies. This approach lets them be more flexible with their lending criteria. Most portfolio lenders assess each application individually ¹². They look beyond just credit scores and focus on several key factors:

Employment stability
Income potential
Size of down payment
Overall financial picture

Borrowers need to think carefully about their situation and understand the long-term financial impact of different lending options. To cite an instance, FHA loans might accept lower credit scores, but borrowers must pay mortgage insurance premiums that make monthly payments higher ⁸. VA loans provide excellent terms but are available only to eligible military borrowers ¹⁰.

Improving Your Chances of Mortgage Approval

Bad credit makes mortgage approval challenging, but several practical steps can substantially boost your chances. Smart preparation and the right approach will determine your success or failure in securing approval.

Saving for a larger down payment

A significant down payment remains your best asset when seeking mortgage approval with bad credit. Lenders demand higher down payments from applicants with credit problems – usually 15% to 25% of the purchase price ¹³. The requirements become stricter especially when you have serious credit problems. Borrowers with IVAs or bankruptcy notices from the past three years should prepare to put down 25% ¹³. Your larger upfront investment reduces the lender’s risk and offers several benefits:

Lower interest rates
Greater lender trust
Improved loan-to-value (LTV) ratios
Higher chances of approval

Finding a co-signer

A co-signer can substantially strengthen a mortgage application if you face credit challenges. This person becomes your financial partner and shares responsibility for the loan ¹⁴. Co-signers need to meet specific requirements:

A solid financial background with good credit
Knowing how to handle payments if the main borrower fails
Full responsibility for payments ¹⁴

Private lenders care more about property value and equity than credit scores. Your co-signer’s credit doesn’t need to be perfect with these lenders ¹⁴.

Working with a mortgage broker

Mortgage brokers who focus on bad credit cases are a great way to get help when credit histories become challenging. These professionals bring several key benefits to the table:

They connect you with niche lenders who accept higher risks ¹⁵
Their experience helps secure loans for clients with past financial troubles ¹⁵
They know how to review different mortgage options for adverse credit ¹⁵
They understand each lender’s specific requirements and policies ¹⁵

A good broker saves both time and money while reducing stress. They find the right loan products and guide you toward better credit scores ¹⁵. These experts pinpoint why lenders rejected previous applications and help create a practical path forward ¹⁵.

Joint mortgage application options

Bad credit applicants can explore joint mortgage applications as a viable option. Lenders review several factors for each applicant at the time they assess the application:

Relationship status (cohabiting, married, family)
Employment status and income
Outstanding credit commitments
Ages of applicants ¹⁶

Keep in mind that good credit from one applicant doesn’t guarantee approval. Some lenders use the lower score between two applicants, while others combine both applications to calculate an overall credit score ¹⁶. Joint applications with bad credit might need larger deposits of 35-40% to get approved ¹⁶.

A specialist broker plays a vital role in joint mortgages with bad credit. These experts can connect applicants to lenders who are more likely to accept their unique situations ¹⁷. Their 10-year old relationships with specialist lenders help them optimize credit reports and access exclusive deals ¹⁷.

Steps to Rebuild Your Credit Before Applying

Smart borrowers rebuild their credit profile before applying for a mortgage. A step-by-step credit repair plan improves your chances of mortgage approval by a lot. This practical approach helps you qualify for better interest rates.

Checking your credit report for errors

Credit report monitoring is the foundation of credit improvement. You can check your credit reports whenever needed. These checks won’t affect your scores because they count as soft searches ¹⁸. Your review should focus on:

Your personal details like name, address and previous addresses
Current status of all accounts (open or closed)
Accuracy of your payment records
Any hard searches or accounts you don’t recognize
Signs that might point to identity fraud

If you find errors, you can file a ‘notice of dispute’ with credit reference agencies free of charge ¹⁹. Credit agencies usually add a note to your report that shows the disputed entry while they look into the issue ¹⁹.

Paying bills on time

Your payment history stands as the most crucial factor in determining your credit score. It makes up about 35% of the total score ²⁰. Late payments show up on credit reports for seven years, though their negative effects fade with time ²⁰. Here’s how you can keep your payment history strong:

Make your regular bills automatic
Pick a specific day each month to handle bills
Keep enough money in your accounts
Sign up for payment alerts
Fix any missed payments right away

Reducing credit utilization

Your credit utilization affects your credit scores by a lot. It makes up 20-30% of the total score ²¹. Most experts suggest keeping utilization below 25%. People with excellent credit typically maintain it under 10% ²¹. Here’s how you can manage your credit utilization better:

Short-term strategies:

Pay your bills before statement closing dates
Ask for higher credit limits
Let credit card companies know about your current income

Long-term approaches:

Don’t close old credit cards to keep your available credit
Think over debt consolidation plans
Switch to cash or debit cards for everyday purchases

Avoiding new credit applications

Your credit scores can take a hit if you submit multiple credit applications within a short time frame. This signals financial distress to lenders ²². Hard searches from credit applications stay visible to lenders and could affect your future borrowing options. Here’s how you can minimize these effects:

Timing considerations:

Wait at least six months before applying for mortgages ²³
Leave gaps between any work to be done on credit applications
Put your energy into managing existing accounts
Look for alternatives that don’t rely on credit

Your credit score won’t improve overnight. Quick results might show up when you fix errors or lower your utilization. However, you’ll need consistent effort over time to build a solid payment history ²⁰. Your credit utilization should stay below 25% to show lenders that you handle credit responsibly ²¹.

Conclusion

Bad credit doesn’t mean you can’t get a mortgage. You’ll face some hurdles, but several lending programs and smart preparation can help you succeed. FHA loans welcome borrowers with credit scores starting at 500. Military personnel can tap into the full potential of VA loans. Portfolio lenders and subprime mortgages create more paths to homeownership, especially when you have bigger down payments or co-signers. These options show that determined buyers can find the right mortgage even with credit challenges.

Getting a mortgage takes careful planning and improving your credit score. Your chances improve when you keep an eye on your credit report, pay bills on time, and manage your credit usage well. Note that lenders look at more than just credit scores. They consider your down payment amount, steady income, and overall money management. Working with experienced mortgage professionals and preparing thoroughly creates a clear path to homeownership, whatever your current credit situation might be.

FAQs

Can someone with very poor credit still obtain a mortgage?
Yes, obtaining a mortgage with poor credit is feasible, though it may present more challenges. Mortgage lenders use credit scores to assess the likelihood of timely repayments and responsible account management by the applicant.

What is the minimum credit score required to secure a mortgage?
The minimum credit score required varies by type of loan:

Conventional Loans: 620
Jumbo Loans: 700
FHA Loans: 500
VA Loans: 620
USDA Loans: 580

What size deposit is needed for a mortgage if I have bad credit?
Mortgages designed for individuals with bad credit often carry higher interest rates and may require a larger deposit. Typically, you might need to provide a deposit of 20-25% of the property’s value, compared to the usual 5-10%.

Which mortgage option is most suitable for someone with poor credit?
The most suitable home loan depends on your specific credit score. If your score is below 600, consider exploring FHA or VA loans. However, improving your credit score before applying for a mortgage is highly advisable to widen your options and potentially secure better terms.