There is a good chance that, if your FICO score is under 620, bank lenders and credit unions will tell you that you do not qualify for a mortgage. This is not necessarily true, however, as you can probably still get a bad credit mortgage, but you may have to turn to alternative lenders.
Consumers with bad credit obtain home loans every day, but they often pay a substantial premium for the loan. If possible, it is best to work on improving your credit score before attempting to get a mortgage. This will widen your available options and save you more money.
Make sure your credit report is completely accurate before submitting your mortgage application. If there are any mistakes, you will need to dispute them with the credit bureau and provide documentation.
You will also need to demonstrate steady income that pays well enough to cover your mortgage, and you should eliminate all other debt. A high debt-to-income ratio (DTI) will make it harder to get a mortgage, particularly with bad credit. Having no current debt will strengthen your application.
You should also put down as much money as you can for a down payment to show the lender you are making a major investment in keeping the home, which improves the odds that you will stay current on your mortgage payments.
Be prepared to provide written explanations for all negative items on your credit report. Explaining to a lender any difficulties you had paying your bills will help, especially if the problems were temporary and are no longer an issue. While going through a divorce or suffering a major illness will not excuse bad credit, it does give the lender context.
If your bad credit is due to defaults on major loans, you must also provide the lender with assurances that this will not occur again, including showing better financial stability, higher income or substantial savings.
If your negative credit history is holding you back from getting a mortgage, you can take steps to improve your credit score and obtain financing. If your score is not too low, lenders may still give you a mortgage, but you will pay a higher interest rate and more fees than a borrower with excellent credit.
Before applying for a mortgage, order free copies of your credit report at AnnualCreditReport.com and fix any mistakes or erroneous items through the dispute process. Do not open new credit accounts before applying for a mortgage, and do not close any old accounts, even if you no longer use them.
If you have completed a short sale, you may want to wait at least two years before applying for a mortgage to get a better rate. You can most likely qualify for an FHA loan within 2 years of bankruptcy, as long as your credit has been perfect since the discharge.
You should also work to improve other areas to make your mortgage application stronger. This includes building up substantial savings, because lenders consider your assets when approving you for a loan, and showing evidence of steady employment with the same employer or in the same industry for two years, if possible.
If you cannot obtain a standard mortgage, this does not need to stop you from buying a home. The following options may be available to you: