How to Get a Mortgage with Bad Credit

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More Americans are getting shut out of the housing market due to bad credit, but you don’t have to be one of them.

Interest rates are low and homes are cheap, so it looks like a great time buy. Except that millions of Americans are shut out of the mortgage market by low credit scores.

A study by Zillow.com concluded that low scores would prevent nearly a third of Americans from obtaining mortgages, even under today’s low-rate conditions. But would-be borrowers running into trouble can try several strategies to boost their chances of obtaining a loan, though nothing is guaranteed.

Normally, low mortgage rates make it easier to qualify for a loan, because monthly payments are smaller on any given amount borrowed. But the Great Recession has caused financial setbacks for many people, driving down credit scores for things like late credit card payments. At the same time, lenders have tightened standards after losing money on loans made with loose rules a few years ago.

The Zillow study looked at more than 25,000 loan quotes requested on its site during the first half of September.

“Borrowers with credit scores under 620 who requested purchase loan quotes for 30-year fixed, conventional loans were unlikely to receive even one loan quote on Zillow Mortgage Marketplace, even if they offered a relatively high down payment of 15 to 25 percent,” Zillow said.

Citing data from myFICO.com, Zillow said 29.3% of Americans have credit scores of 620 or lower, which effectively shuts them out of the mortgage market.

Among those who could qualify for loans, the lowest interest rates were reserved for the 47% of Americans with credit scores of 720 or higher. In the first half of September, they were quoted rates averaging 4.3% while rates gradually got higher for applicants with poorer credit, reaching 4.9% for those who just barely qualified with scores of 620 to 639.

Anyone shopping for a mortgage should first check for errors in their credit history. Also, try to refrain from applying for new loans, such as credit cards and car loans, as this can reduce your credit score.

If you still have problems after cleaning up your credit history, try your credit union or small local bank. Some still allow loan officers some discretion, while big lenders are more likely to rely on automated systems with rigid formulas. If your credit score was reduced by some late payments after you lost a job, but you’re now employed and caught up, a local loan officer may qualify you despite the black mark.

Your chances of getting a loan will improve if you make a large down payment, or if your loan size is smaller in relation to your income. Consider buying a property that’s less expensive.

Also think about getting a co-signer on the loan, such as a parent with good credit. Remember, the lender will hold the co-signer responsible for the entire debt if you default, regardless of the arrangement you and the co-signer have made.

If you’re offered a loan at a higher rate than you’ve seen advertised, think about getting the loan anyway. The 4.9% rate being offered to people with low credit scores of 620-639 is still a bargain by historical standards. For every $1,000 borrowed, you’d pay $5.31 a month at this rate versus $4.95 at the 4.3% offered to borrowers with top credit, according to the Mortgage Loan Calculator.

Use the shopping tool to locate some attractive loans, then call the 800 numbers to discuss the situation. Lenders are being especially cautious these days, but they won’t make money if they don’t approve loans.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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