Applying for a mortgage is already a struggle; it will be more complicated to use for a mortgage when you have bad credit. Your credit plays a significant part in your daily life. Whenever you want to purchase something or apply for a specific type of loan, will you be able to apply for a bad credit mortgage?
Below are the Dos and Don’ts before you apply for a bad credit mortgage.
DO’s before Applying for a Bad Credit Mortgage:
1. Work on your credit score.
Your creditworthiness is measured by your credit score, which is a three-digit number. The higher your credit score, the better your mortgage deals.
The first thing you need to do before applying for a mortgage is to check your credit score. Start working on it when you see that it is lower than average.
- Paying your bills on time can help.
- Stay below your credit limit.
- Limit the number of credit cards
- Maintain one account that can help generate a higher credit score.
2. Make a sizeable down payment.
Mortgage lenders usually require a minimum down payment of 5% of the purchasing home total. However, you might have to go higher than 20% of the purchasing amount if you have bad credit. That way, your lender can put you in the lower-risk borrower category.
It will give the mortgage lender a sense of assurance that you have financial stability. In addition to that, your monthly mortgage payment will be lower if you pay a higher down payment. And lastly, you won’t be required to purchase a mortgage loan.
3. Find a bad credit mortgage lender.
A-Lender or traditional lenders won’t be your best option if you have bad credit. A B-Lender or a Private Lender will be a better option for a bad credit mortgage. They usually won’t check on your credit score. Although the downside is, they charge a higher interest rate and fee.
4. Joint or Co-signed Mortgage.
A joint or co-signed mortgage is having a third party involved. A co-signer with a good credit score can get you a better offer that way. The co-signer will be responsible for your monthly payment if you fail to do so.
However, finding a third party willing to co-sign takes a lot of work. One reason is they are put at risk when they co-sign for someone with bad credit.
5. Focus on the next renewal.
If you increase your credit score within the span of your mortgage term, you will be able to switch from B-Lender to A-Lender on your next renewal. Expand your resources and look for better deals elsewhere. If you have increased your credit score, you can qualify for better rates than sticking to your current rate and terms.
DON’Ts before Applying for a Bad Credit Mortgage:
1. Increasing your debt.
A bad credit mortgage or not, racking up your debt before applying for a mortgage will not do you any good. Your debt-to-income ratio will skyrocket, which will affect your qualification for a mortgage. Your DTI ratio is one thing a mortgage lender will check. You won’t get better deals if you have a high DTI ratio.
2. Falling behind bills.
The first thing you want to do if you want to apply for a mortgage is to protect your credit score, and falling behind on bills will hurt your credit score. Keep track of when you pay your bills. The mortgage lender will check your payment habits as a preference for how you repay the mortgage.
3. Maxing out credit limit.
Your credit utilization ratio should stay within 30%. The credit utilization ratio compares the revolving debt with the total amount of credit you still have available. Keeping your credit utilization ratio as low as possible is a plus point.
4. Closing a credit card account.
While closing a credit card account may be beneficial in other circumstances, it is another story when you apply for a mortgage. Your credit history is essential when applying for a mortgage, especially if you have bad credit.
If you close a credit card account, you’re reducing your level of available credit; then, your debt-to-credit ratio could skyrocket.
The older your credit history, the more essential it is. Even if you’re not using it, ensuring it is active can be a plus point when applying for a mortgage.
5. Switching jobs.
Mortgage lenders will check your employment history. You should be on the same job for at least two years for lenders to ensure you have a stable income. And switching jobs right before you apply for a mortgage is a mistake.
Your income stability will depend on how long you’ve worked on the same job.
Having bad credit will not restrict you from applying for a mortgage. However, you can only get the best deals available in the market if you keep your score low and do something to boost it.
As soon as possible, fix your credit score to guarantee a better mortgage deal. Bad credit mortgage rates are no joke. Imagine the thousands of dollars you can save with good credit.