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Steps For Getting A Mortgage After Bad Credit

Steps For Getting A Mortgage After Bad Credit

Qualifying for a home mortgage after experiencing bad credit can be difficult but it is still possible with a little planning and hard work. There are numerous credit repair steps that can be taken to improve your credit score which will go a long way towards convincing lenders of your financial turnaround. If you're serious about buying a new home and getting the best interest rate you can on a mortgage then take a look at the steps below when getting a mortgage after bad credit.

Evaluate Your Situation

Take a look at your current situation and evaluate it in the context of trying to receive a mortgage. The first thing you should do is to copy of your credit report from one of the three major credit reporting agencies. By law they are required to provide each consumer with one free copy of their credit report every 12 months. Once you have your credit report, examine it closely and look for any inaccurate information which can be corrected and address any black marks to improve your credit score. This is the first piece of information any potential lender will use to determine whether or not he prequalify for a mortgage. Gather together all personal and financial references as well as one years worth of utility payments. Normally, most consumers have a credit history good enough to qualify for a mortgage with minor adjustments.

Fix Credit Report Errors

Each credit reporting agency has a form available on their website to address inaccurate information as it pertains to a credit report. By law, any corrections sent to a credit bureau must be addressed within 30 days with either a resolution in the consumer's favor or an explanation of why it won't be updated. Credit report errors range anywhere from the mundane like a misspelled street address all the way to thousand of dollars reported as outstanding debt in default when the balance is actually paid in full and the account is closed. Be sure to contact Experian, Equifax and TransUnion as soon as possible since the sooner your credit report is correct the sooner you can qualify for a mortgage.

Write an Explanation

Each item on a credit report provides a space for the consumer to write an explanation about the debt in question. Sometimes it will not be possible to resolve a debt in a sufficient or timely manner and it must be addressed directly on the report for potential lenders to review. This is possible due to the Fair Credit Reporting Act where consumers are allowed to write 100 word explanation addressing credit history issues. Depending on the issue, this may be enough to mitigate any red flags raised by outstanding debts or other black marks. Sometimes an explanation is all that's needed to offset the damage done by a negative report from a creditor. Use this ability to your advantage to help you get a mortgage when you have bad credit.

Pay Outstanding Debts

Sometimes the best thing a consumer can do is cut their losses and move on and this is especially true when addressing outstanding debts. If the amount is small then it can be to your advantage to pay the balance. If you do this be sure to receive a written statement from the reporting organization that the balance is zero and the account is in good standing. For larger balances, consider making payment arrangements since most creditors will be happy to receive any amount even if it's for less than what is owed. Try to negotiate the waiving of penalty fees and interest and offer to settle the account for $.30-$.50 on the dollar. Document all calls and use e-mail if possible and verify that your credit report will be updated with the correct account information and that the corresponding black mark will be removed.

Reduce Available Credit

There are two particular issues involved with credit which are the debt utilization ratio in the total amount of available credit. Credit utilization is directly related to qualifying for mortgage and most lenders will not issue a loan if existing debt payments are more than a certain allowable percentage. This is an easy fix since it requires simply paying down debt. The second issue is total available credit which can be a potential red flag for lenders. This is because having access to too much credit means the consumer is susceptible to getting in over their head by making expensive purchases. Take care if you decide to close or cancel certain credit cards as it may negatively affect your credit score if not done properly. Try to maintain three active credit cards where two are used primarily for day-to-day or online purchases and the third is for emergency situations only.

Establish New Credit

For consumers with bad credit it is essential to start the process of rebuilding your credit history and increase your credit score. The three easiest ways to do this is to consistently make payments on existing debt on time and for the correct amount, obtain a new secure credit card if you do not have access to existing lines of credit and take out a small installment loan for between $500-$1,000. Consistent monthly payments over a period of two years will have the greatest overall effect when repairing your credit and trying to qualify for a mortgage. If you no longer have access to credit cards, consider getting a small limit secure credit card which will jumpstart the credit repair process. An installment loan for a small amount helps because it is important to diversify your credit mix and show that you can qualify for a loan similar to a mortgage.

Open a Savings Account

Qualifying for a mortgage after having bad credit means it is almost mandatory to put provide a significant down payment when buying a home. To that end, open a savings account and have automatic monthly transfers from your checking account or make additional deposits to start building your mortgage fund. Individuals with bad credit are often required to put minimum of 20% down on any home purchase which can be a significant obstacle since it may take years to save enough. This isn't exactly a bad thing as the years it takes to save for the down payment will coincide with the time it will take to properly repair your credit. Walking in with a sizable down payment will also convince lenders that you're serious about doing what it takes to buy and maintain a new home.

Image by: Andy Chase