How to Get a Home Loan With Bad Credit

Home loans for people with bad creditTo easily snag a home loan, an applicant needs to be a "triple threat" -- have an excellent credit rating, a large down payment, and low debt-to-income ratio with steady significant income. But even if you have bad credit, you don't have to rule out future home ownership.

Homebuyers with bad credit due to a foreclosure or bankruptcy, or who have previously been turned down for a loan, can still get a home loan.

Melanye Miller, a 40-something Chicago schoolteacher, has been hankering for three years to move out of the single-family home she was renting, so that she could purchase a place big enough for her and her three children. But when her credit report revealed a poor score, she knew banks would not give her a home loan, especially not one with zero down payment.

To increase her chances of getting a home loan, Miller began a long road to recovery from her bad credit history, which included not using credit cards and setting aside money each month for her house fund. Finally, in November, after saving for almost two years, she purchased a four-bedroom condo. "I saved and saved, but I decided to purchase a foreclosure condo because it was less expensive and required fewer funds," she says. "Owning a home is not out of the question if you have bad credit. You just have to do your research, know what you can really afford, do even more research, and save your money."

There are hurdles, for sure. But for those with a less than stellar credit history, you need to highlight your "compensating factors" -- those mitigating factors not reflected in your bad credit score or on your credit report.

Even though there are few opportunities for personal appeals when applying for a home loan -- for instance, explaining why a bill was not paid on time -- you can still try to present yourself in the best possible light. It just may help tip the scales in your favor when you've got bad credit in your history.
Here are seven compensating factors to consider submitting with your home loan application to help improve your chances for obtaining a mortgage, even with bad credit:

1. Flaunt other assets. If you don't have a large cash reserve or a large down payment, show loan officers the financial assets you do have. For example, if you have whole life insurance, list the cash value on your home loan application. If you have a sizable 401(k) or other retirement accounts, be sure to list them all and their current values. This strategy lets lenders know that if you're ever in a bind paying your mortgage, you're able to pull from one of these other sources to make ends meet. And if you're seeking to refinance, showing a low loan-to-value rating is a huge plus.

2. Stress job stability. If you have been working in the same industry for several years, and even with the same company for, say, five years or longer, be sure to highlight that to offset a bad credit history. And don't forget to mention any regular pay raises that you've received. If you have a cost-of-living increase every two years, or an annual merit-pay increase, be sure to mention in your home loan application how your income has risen over the years. The same goes for regular bonuses. Proof of rising pay or additional money will help lenders know that you will have funds to offset any possible rise in expenditures, such as property taxes or utilities.

3. Show discipline. Prove to lenders that your bad credit is a thing of the past and that you know how to save. If you've been socking away $600 a month to a savings account or have been contributing yearly to a retirement account, this will help you obtain a home loan. You are trying to show discipline, consistency and stability.

Real Estate Essential How-To-Guides on AOL Real Estate: Home Buying, Selling, Renting, Moving and Home Improvement 4. Willingness to stay put. Prove to lenders that you're not a flight risk. Home loan lenders like to believe that you're going to stay put in that home for some time (though you can always upgrade or downsize). Show that you're committed to the home, neighborhood or greater community by listing how long you lived at your last residence, if the length of time was significant -- three years or more. If that time was spent living in your mother's basement, that might not fly, unless you show that the home you're interested in is down the street from Mom. Strong ties to the community can help.

5. Increase your down payment. The days of zero down payments are pretty much gone. Yes, you can get a house with a 10 percent down payment, or 3.5 percent under FHA. But in general, the larger the down payment, the quicker the home loan approval. Historically, the single largest obstacle to purchasing a home has been amassing enough money for the down payment and closing costs. If you can't come up with that money on your own, there are a few down-payment assistance programs as well as state and local municipality programs to help. Check with your city for possible homebuyer assistance; show your banker that you're not afraid to ask for help and that you have the tenacity to solve any of your own financial problems.

6. Don't bite off more than you can chew. Be reasonable about the amount of house and home loan you can afford, even if some real estate agents or brokers are telling you that you can afford more. The best advice is to start out smaller than you want. Spend some time getting to know home prices in the area where you want to buy, and know that you always can move up later. It's far better to own a home you can afford than to move into something outside your payment comfort level -- only to lose it and amass more bad credit down the road.

7. Have proof. It's one thing to tell potential home loan lenders that you never were late on your rent, or that you always pay your child support obligations. It's another thing to be able to show them. Be prepared to give documentation to back up all of the items on your compensating factors list. For example, show canceled checks for payments you've made to any entity, show bank statements to prove regular deposits of income or contributions to retirement. A letter from a landlord saying that you paid rent on time is not enough. If you cannot produce these documents, you will raise doubts about the veracity of your credit history.

The bottom line is there are certain red flags that give home loan lenders pause. When your credit history is less than perfect, get past the warning signs by highlighting other, positive aspects of your financial profile.

Sheree R. Curry
, an award-winning journalist, writes about personal finance and real estate. Her work has appeared in Fortune, the Wall Street Journal,, Entrepreneur, People and, among others.

More on AOL Real Estate:
Find out how to calculate mortgage payments.
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Find foreclosures in your area.
Get property tax help from our experts.

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FHA - VA Approved with Credit Scores as low as 580
• Direct Endorser of FHA and VA loans:
FHA Loan: 3.5% down payment, plus 580 or greater credit score VA Loan : 0% down payment, plus 580 or greater credit score.
• FHA Loan: 580-619 credit requires a debt to income ratio of 43% or less to avoid automatic downgrade to manual underwrite, 620+ FICO up to 55% DTI with an Automated Approval
• VA Loan: 100% financing up to a 46% DTI on a manual underwrite. [If compensating factors needed, see list below]
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• 1-3 months of reserves (PITI)
• Job stability (2+ Years with Current Employer)
• A potential of a substantial increase in earnings due to job training or education
• Current rent is comparable to or more than proposed mortgage payment (Minimal payment shock)

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Loan Officer
1300 West Walnut Hill Lane, Suite 257 Irving TX 75038
Irving Office Direct: 214-281-8623 Cell: 817-874-0465 Fax: 888-377-8031
Company NMLS # 32416-Branch NMLS #1219148

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October 07 2014 at 8:09 PM Report abuse rate up rate down Reply

There are lending companies in the market that offer subprime mortgage. For this reason, many people who were able to purchase the house of their dreams did so with the help of a mortgage loan. Needless to say, applying for a mortgage may not be that easy if you have a bad credit history. Many lenders want customers with good to excellent credit and if you have imperfect rating, you will be considered as a high risk borrower.

September 18 2014 at 1:48 AM Report abuse rate up rate down Reply
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July 25 2011 at 11:54 PM Report abuse rate up rate down Reply

How do you go about buying your home back after bankruptcy, when they (bank) can't find the missing papers. Home is still in my name. They can't sell it, I can't buy anything else because it's in my name.

July 16 2011 at 2:06 PM Report abuse rate up rate down Reply

I think the 3 credit gurus are a bunch of hog wash. They drop your credit for peeing on the grass and will drop it alot. We don't need them to rule our lives. What ever happened to trust and honesty. They are nothing but crooks ******* us for every penny they can get. You know who pays them to do there job, You do everytime you get a loan. If they don't think they will get their pay then no loan. Almost as good as Insurance they you pay for years and when something happens they raise your rates. They say "we have to recoup our money" well thats BS. What did they do with the money I paid them for 17 years? They sat back and lived high on the hog. They all should be tared and feathered like the good ole days. Think I'm pissed? Well try looking for a low interest rate for a mortgage and see you score shot down. Its rediculous.A man can't even shop around for cheaper rate without them screwing you over. Thats what this whole articule is about but they danced around it. Who in hell has time to do all this and work too. Only the rich who don't need a loan. Screw them all. By the way I have had a bkrpy and Foreclosure. I'm retired military and now disabled from military problems. I have income but no loan.

May 23 2011 at 10:31 AM Report abuse rate up rate down Reply
linda maealiuaki

Hi, I recently had a bk chapter7 and have bought a car to help repair my credit , and had to deed inlieu my hm because it was so upside down now I have won my disability case and will have income with my husbands income and will put a large amount down on a home leaving a little like 20 or 30 thousand left to pay on a home can I find a mortage company that will fund that amount.

May 05 2011 at 4:16 PM Report abuse rate up rate down Reply

yes i was part of the 2006 foreclossures and couldnt get a refiance instead i got get out letter,in 30 days didnt recieve any of my escrow and asked about it i was switched through so many different people i might as well been in china , now i have it on my credit report bama made my company to get medical for everyone paycheck was down another 520 a month didnt need extra medical any way car was repoed do to money was going to medical so i guess i need help please respond and yes iam retired military help me please

March 10 2011 at 8:18 PM Report abuse +1 rate up rate down Reply