How To Get Approved For A Mortgage With Bad Credit
Updated March 18, 2018
Why Was I Turned Down For A Mortgage?
Being denied for a mortgage can add to the stressful and time consuming process of moving, since this is an important step to help finance your new home. If you are wondering why you were turned down by lenders, here are some possible reasons:
- Since lenders check to make sure you have a steady source of income for monthly payments, you may have been turned down due to your employment status or outstanding debts.
- For certain loans like the FHA mortgage, there is a requirement that you need at least two years of consistent employment.
- Another possibility is mortgage fraud, which is a less common issue that takes place when a borrower gives false or exaggerated information to the lender about their financial situation.
- Because lenders look at your savings, find homes in price ranges that suit you and your budget.
- The final and most likely reason you have been denied for a mortgage is your credit score. You may have a low score or recently taken a negative hit to your credit from missing a payment or taking on additional debt.
What Is The Best Credit Score To Get A Mortgage?
Why does your credit score matter so much? For starters, a mortgage may be the largest loan you ever take, and includes a down payment, insurance, and taxes. This means the better your credit score, the lower your interest rate is, which can save you thousands in the long run.
The minimum credit score to qualify for an FHA (Federal Housing Administration) loan isn't a set number and fluctuates depending on the state of the economy. When the economy is in a recession, it's normal for lenders to enforce more restrictions, and during these times even an excellent credit score may not be enough to qualify you for a loan.
In most cases, it is difficult -- although not impossible -- to qualify for a loan with a credit score of 580. If your credit score is considered good and falls between 681-720, you will be able to take out a loan with more favorable rates. If you have an excellent credit score of 740 and above, you will not only qualify for a loan but also have a much lower interest rate.
What Can I Do To Raise My Credit Score?
The difference between qualifying for a loan and being rejected might be a fraction of a percentage. If you are new to credit, securing a credit card is one basic method to start building up your credit, since lenders are hesitant to give you a loan if you have no visible credit history. However, be wary of opening too many new credit lines since that can actually decrease your score.
If you are looking to secure a small boost for your credit score, the solution may be as simple as paying on time or paying off some credit cards and other debts before reapplying.
While you pay off any debts, avoid closing your accounts since that can hurt your credit score. Even if you are spending the same amount, you are using a bigger portion of your available credit.
Another option is to take out a credit builder loan, which is a loan secured by your personal funds and repaid monthly, or take out another account that you can use as a credit line.
Although it may take 1 to 3 months to see any changes in your credit history, many lenders use a different reporting system called rapid rescore to find your new score only a couple of days after the changes are made.
One final and important task is to look for a credit monitoring service that gives you regular updates on your credit score. A few companies that offer this service include:
- Lexington Law: The Concord Premier plan ($99.95/month) and Premier Plus plan ($119.95/month) both offer credit monitoring and unlimited disputes.
- CreditRepair.com: At $99.95/month, CreditRepair.com offers TransUnion credit monitoring, FICO score tracking, and disputes.
- The Credit People: With an initial setup fee of $59/month and a monthly fee of $59/month, this plan offers credit monitoring and unlimited disputes.
- Ovation Credit: At $89/month, the Essentials Plus Plan offers unlimited disputes and 24/7 TransUnion credit monitoring.
Since you are looking to get a mortgage, you most likely want to be approved quickly. If you are looking for a faster boost of your credit score, credit repair companies can work on your behalf and dispute errors on your credit report such as identity fraud, incorrect payment statuses, and negative strikes for late payments. Some of the companies known for their quick results are:
- Credit Saint: Many customers see initial results in 30 to 45 days. They specialize in improving credit scores to qualify for lower rates, give you tools to build new credit, and help you build credit by providing free referrals to lenders, banks, realtors, mortgage brokers, and auto dealerships. Because of their fast dispute process, you may see improvements within the first month.
- CreditRepair.com: The average customer reported seeing initial results in 30 to 60 days, although extensive results are seen in 4 months.
- Ovation Credit: Many clients saw initial results in 30 to 45 days, but after 6 to 8 months in credit repair they saw an average of 19 improvements.
With these steps, you will be able to raise credit score enough to secure a mortgage for your new home.
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