For potential homeowners seeking pre-approval for a mortgage loan, it’s a multi-step process. But if you’re a candidate with bad credit, your journey may be even more challenging thanks to your numbers suggesting you’re a high risk for default.
While there’s no guarantee you’ll get the requisite funding, by taking these steps, you may find your chances will improve.
Reviewing your credit scores
Regardless of your credit history, the process for the home loan preapproval process will begin with a lender reviewing your credit history. You should enter your meeting with an awareness of your credit score or the Fair Isaac Corp. (FICO). This number has a range from 350 to 800.
If you have a FICO score from 580 to 620, you should be able to receive a pre-approval; however, if you are seeking a preapproval with a credit score lower than 580, you will face difficulties.
There’s no need to panic if you fall into this range. Build a case as to why you’re a viable candidate and be ready to answer a lot of questions.
Also be sure that your lender is still willing to work with you and take these extra steps.
Painting your financial picture
To show you’re more than just a low credit score, your lender will likely ask that you share your financial picture by giving over copies of your tax returns, W2s, pay stubs, your employment history, assets, liabilities and utility bills. Get ready to explain blemishes on your credit history such as a bad debt or a judgment.
If you have a bankruptcy or foreclosure during the last seven years, be prepared to show your payment history since then. Have you been paying your bills on time after that incident?
Also, you may need to pay a larger down payment such as 20 percent. Are you financially ready to do this? What amount are you ready to put down? If you have this money in the bank, show your statements.
Studying the guidelines
Your lender will have a host of loan products at his hands and he’ll need to review their various guidelines as they will all differ. Whether it’s a loan by a government agency (the Federal Housing Administration (FHA) or the Department of Veterans Affairs) or the familiar government-sponsored entities (Freddie Mac or Fannie Mae), they will bring their own set of standards and will require a thorough examination.
One loan to keep an eye on is the Federal Housing Administration (FHA). It has made changes for 2015 for its FHA loans, making things easier for those with bad credit.
Under Freddie Mac and Fannie Mae’s guidelines, your low credit score may carry less weight. This is another route to go.
Keep in mind, the lender may need to think out of the box and do some research for additional products. Is he/she willing to do so?
Considering subprime lending
Another option for those with a too low credit score (even those with either below excellent or good credit scores) is to go with a subprime loan. Lenders will charge a higher rate for this, somewhere between one to seven points. This is done to address the higher risks posed by you and potential customers who tend to bring higher numbers of foreclosures and default.
Are you willing to pay more? Do you have the budget to cover this?
These steps may sound daunting but remember all prospective homeowners undergo a process. Don’t despair if this doesn’t initially work out. You can try working with a different lender and while undergoing this process, continue working toward an improvement in your credit history.