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Securing a Home Loan with Bad Credit – Part I

When it comes to securing a home loan today one of the biggest misconceptions is that you need to have an excellent credit rating, a large down payment and low debt-to-income ratio with steady significant income.  But the truth is home ownership can happen even if you have bad credit due to a foreclosure or bankruptcy or if you have previously been turned down for a loan.  Here are some things to keep in mind.

For the past three years, Suzanne Cameron, a 30-something St. Louis schoolteacher, longed to move out of the single-family town home she was renting.  She wanted a bigger place for her and her three kids.  Unfortunately, her credit report showed a poor score and she knew lenders wouldn’t give her a home loan let alone one with a zero down payment.
So Cameron resolved to increase her chances of owning her own home.  She cut up her credit cards and set aside money each month in a housing fund.  After saving money for almost two years, she bought a four-bedroom foreclosure condo because it was less expensive and required fewer funds.  “Research is the key,” she says.  “Knowing what you can afford and saving your money can make home ownership a reality sooner than you think.”

home yellowCameron’s journey to home ownership had its hurdles.  Some months she wasn’t able to save as much as others due to medical expenses and fluctuating gas prices.  When submitting her home loan application, Cameron highlighted mitigating factors not reflected in her bad credit score on her credit report which she believes helped improved her chances of obtaining a mortgage.
One mitigating factor loan applicants should consider highlighting is the financial assets they do have.  While you may not have a large cash reserve or the ability to make a large down payment, you may have a decent sized 401(k) or other retirement accounts.  Be sure to list their values to show lenders that if you’re ever in a bind paying your mortgage, you could pull from one of these sources to make ends meet.

Another factor that isn’t reflected in credit scores is job stability.  If you’ve been working in the same industry with the same company for five or more years, highlighting this can help to offset a bad credit history.  Be sure to mention regular pay raises you’ve received, whether these raises have been a cost-of-living increase every two years or an annual merit-pay increase.  By showing lenders proof of rising pay you’ll show them that you have funds to offset any rises in expenditures like property taxes and utilities.
Showing lenders that you are disciplined is also essential.  To secure a home loan you’ll want to prove to lenders that your bad credit is a thing of the past and that you know how to save money each month.  If you can provide bank statements and other documentation that shows you’ve been saving $600 a month in a savings account or contributing to a retirement account, you will prove your discipline, consistency and stability, all factors that lenders look for when it comes to loan approval.

In “Securing a Home Loan with Bad Credit – Part II,” we will look at additional factors that lenders take into consideration when it comes to securing a home loan.