From Bad Credit to Approved: Your Guide to Changing the Bad Credit Mortgage Paradigm

You're ready to buy a home, but the bank turns you down citing your credit score. It's a terrible position in which to find yourself. You know that you're responsible, and that you would be able to make your mortgage payments on time, but the lender isn't willing to take the risk. The good news is that a bad credit mortgage can allow you to get into a home even if your credit score isn't perfect. However, there are a few things you'll need to know to go from bad credit to approved for a home loan.

Your Unique Financial Situation

One of the most important considerations when it comes to obtaining a bad credit mortgage is to realize that everyone's financial situation is different. You might be able to take a number of different steps to make yourself a more appealing candidate for a home loan. For instance, while your credit score might be low, it could be possible to save up and put down more than 20% as a down payment. That could go a long way toward encouraging lenders to work with you.

Considerations with Your Credit Score

A bad credit mortgage may be the best option if your credit score is particularly low. However, if your score is particularly low and the interest rates you're offered are very high, it might pay to wait and do some damage control. Rebuilding your credit score takes time and effort, as well as a fiscal strategy, but it can be done. Ultimately, the higher your credit score, the better the interest rate you'll be offered and the more lenient the terms you'll be given.

DTI Considerations

Being declined for a conventional home loan and forced to consider a bad credit mortgage might have little to do with your actual credit score. It could be more to do with your DTI, or debt to income ratio. In fact, a high debt to income ratio is the number one reason why would-be homeowners are denied a mortgage loan. This is your total debt load, including any student loans, other home mortgages, auto loans, and the like versus how much your household earns in income. While Fannie Mae might have raised their DTI to 50%, most lenders still require no more than 43% for a qualified mortgage.

Mortgage Underwriting

Perhaps the single most important consideration for anyone struggling with bad credit, a high debt to income ratio, or other financial problems preventing them from getting a home loan is to work with the right mortgage underwriter. You want a company that has years of experience with bad credit mortgage clients, and that knows the right steps to take for your unique financial situation. In fact, the right mortgage underwriter can greatly increase the chances of you being approved for a mortgage loan.

As you can see, while it may not be the simplest process in the world, you can go from being denied a home loan to being approved.