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, theStreet.com, Entrepreneur, People and HousingWatch.com, among others.

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

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Chris

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]
• 3 Open Trade Lines with 12+ months recent activity & positive payment history
• Alternative trade lines accepted: utilities, car/renter's insurance, cable, phone, etc…
• Loan Processing and Underwriting all under one roof
• 15- 21 day Turn times from Contract date to Fund Date
• Same Day Credit Analysis and Conditional Loan Approvals—7 days a week

Compensating Factors [When Necessary on a Manual Underwrite]
One or more of the following:
• 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)

Chris Mallon
Sr. Account Executive
1300 West Walnut Hill Lane, Suite 257 Irving TX 75038
Irving Office Direct: 214-281-8623 Cell: 817-874-0465 Fax: 888-377-8031
Email: chris.mallon@nlc-loans.com
Company NMLS # 32416-Branch NMLS #1219148

December 01 2014 at 2:22 PM Report abuse rate up rate down Reply
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November 25 2014 at 11:01 PM Report abuse rate up rate down Reply
Chris Mallon

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].
• 3 Open Trade Lines with 12+ months recent activity & positive payment history.
• Alternative trade lines accepted: utilities, car/renter's insurance, cable, phone, etc….
• Loan Processing and Underwriting all under one roof.
• 15- 21 day Turn times from Contract date to Fund Date.
• Same Day Credit Analysis and Conditional Loan Approvals—7 days a week.

Compensating Factors [When Necessary on a Manual Underwrite].
One or more of the following:
• 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).

Chris Mallon
Sr. Account Executive
1300 West Walnut Hill Lane, Suite 257 Irving TX 75038.
Irving Office Direct: 214-281-8623 Cell: 817-874-0465 Fax: 888-377-8031.
Email: chris.mallon@nlc-loans.com.
Company NMLS # 32416-Branch NMLS #1219148.

November 17 2014 at 4:24 PM Report abuse rate up rate down Reply
Malaysia Jill

What's wrong with renting??

People should save their money until they have 20% or more. Cash only is ideal! Learn from the past people!

Of course they look at me like I'm crazy when I suggest they cut a $100+ a month cable bill. Or drive a car that is 3 years old. Or only fill up their tank from the cheapest place according to GasBuddy. Or get $25/month budget car insurance from 4AutoInsuranceQuote. Or cook their own food instead of spending a hundred a week on restaurant food (or far more if they like the bar).

You live exactly like people did in the 1970's, and suddenly there's tons of money. Usually moderate earners can save $500 a month on these types of luxuries. May not seem like much, but it's usually the difference between being in financial trouble, and at least not losing ground.

My point is that it's so odd that people seem to forget all the little things we have, buy, use - that they didn't in the "better" times. That stuff isn't free.

November 16 2014 at 10:22 PM Report abuse rate up rate down Reply
Chris

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]
• 3 Open Trade Lines with 12+ months recent activity & positive payment history
• Alternative trade lines accepted: utilities, car/renter's insurance, cable, phone, etc…
• Loan Processing and Underwriting all under one roof
• 15- 21 day Turn times from Contract date to Fund Date
• Same Day Credit Analysis and Conditional Loan Approvals—7 days a week

Compensating Factors [When Necessary on a Manual Underwrite]
One or more of the following:
• 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)

Chris Mallon
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
Email: chris.mallon@nlc-loans.com
Company NMLS # 32416-Branch NMLS #1219148

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

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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