Bad Credit History Shouldn’t Get in the Way of Purchasing Your Dream Home

Have you just come across your dream home but fear that your mortgage application will be rejected? Don’t lose heart just yet.

Having a bad credit history may not look good on your credit report, but it doesn’t mean you can’t secure a good mortgage. Lenders today won’t judge you exclusively based on your credit history. Even if you’ve had some trouble repaying loans or credit in the past, you should still look into your mortgage options.

In this article, we’ll show you how to increase your chances of obtaining a mortgage for your dream home despite having a less than ideal credit history. First, though, let’s understand exactly what causes a bad credit history so you can put an end to bad financial habits.

Bad Credit History – The Main Causes

Bad credit history shows up in your annual credit reports. Depending on the financial institutions you’re using, it may show on reports from all reporting bureaus or only on some of them. Either way, the main culprits tend to be the same:

One or more late loan payments during the last 7 years.
Regular delays in payments.
Requesting a lot of credit in a short amount of time.
Having too many consumer loans and credit cards (think 4-5+).
Having multiple microloans.

It’s important to look beyond these causes at the underlying reasons that have led to you missing on payments or taking on more loans than you can handle.

For example, you may have become dependent on one loan to pay another. Or perhaps you consistently miss payments because your current mortgage comes with a steep interest rate.

Whatever the causes, you can fix your credit by addressing the main problem areas in the report. Also, you can look for lenders who are open to borrowers with a bad credit. Not all lenders are equally strict with their mortgage requirements, and you can use that to your advantage.

Improve Your Credit History Any Way You Can

Put first things first—look for ways to improve your credit history. There are both conventional and non-conventional ways to do this. Here are some ideas.

Check your credit reports for inaccuracies and dispute them.
Pay off your debts and maintain a low credit utilization ratio (less than 30% of your credit).
Use home-banking or another similar service to automate bill payments.
Use free services like Experian Boost to gain credit by paying utility and phone bills.
Rebuild your credit history by responsibly opening new accounts and paying them on time.
Consider short-term loans that can help build your credit history.
See a credit counselor to learn how to maximize results.

Get a Mortgage Professional Who Understands Your Situation

Not all mortgage brokers are prepared (or willing) to deal with borrowers with a bad credit history. Some mortgage professionals will not even consider your application, let alone offer you guidance. Having the right person on your side can make a big difference—it can determine whether you’ll get that dream home or not.

Look for an agent who handles clients with problematic credit histories.
Consider alternative lenders who provide options beyond mainstream mortgages.
Ask your broker if he or she recommends any credit-building loans.
Be honest about your credit history and ask for advice—don’t pretend you have everything under control if you don’t.

Have a Cash Reserve

Having a sizeable cash reserve can make a mortgage more attainable. You can use it to put down a larger down payment—think 20% or more of the value of the property. At the same time, it can help put at ease lenders who question your financial stability.

Pro tip: If you are in a position to sell a smaller property to build a cash reserve, go for it—after all, you’ve finally found your dream home.

Consider Getting an FHA Loan

Federal Housing Administration (FHA) loans come with more flexible credit requirements. Since they are insured, lenders who offer them face lesser risk. You can get an FHA loan with a score as low as 500 provided that you can make a 10% down payment.

Pro tip: Another advantage of an FHA loan is that your lender may pay the closing costs. The downside is that you’ll likely have to pay higher interest as well as private mortgage insurance.

Find a Flexible Lender

We’ve already talked about the importance of using the services of a mortgage broker who understands you. He or she can open the way to a more flexible lender than your average bank. You can also use our service to get a free quote.

Pro tip: Once you find a lender, make sure to consider all features of the loan, including closing costs, mortgage insurance, and fees. Sometimes, low interest rates are deceptive—they hide ugly fees.

The Wrap Up

Bad credit may be an inconvenience, but it’s not an obstacle to financing your dream home. If good luck helped you find the home you’ve always wanted to live in, use the tips we’ve shared with you to secure a mortgage.

There’s a lot you can do to prove to lenders that you’re a trustworthy borrower, and it all starts with getting an agent who understands where you stand. Good luck!